In my last post, I talked about the Pareto Principle — the 80/20 rule, which can help us prioritise tasks on a daily basis. However, one of the troubling areas where the Pareto principle is observed is in the distribution of income and wealth across the world.
The current income distribution looks like this,
Oxfam in the report ‘An Economy for the 99%’ notes the following,
Since 2015, the richest 1% has owned more wealth than the rest of the planet. Eight men now own the same amount of wealth as the poorest half of the world. Over the next 20 years, 500 people will hand over $2.1 trillion to their heirs — a sum larger than the GDP of India, a country of 1.3 billion people.
It’s the same story in India. The richest 1% of Indians now own 58.4% of the wealth. According to the 2015 World Wealth Report, India had 198,000 high net worth individuals (annual income over $1 million) with a combined wealth of $785 billion.
Now let’s take a moment for it to sink in.
Eight men now own the same amount of wealth as the poorest half of the world.
You’re probably reminded of people like Jeff Bezos and Bill Gates, maybe the Ambanis if you are Indian. You’re probably reminded of that Senior Executive who is doing well at work and has recently bought a BMW or Porsche. You may feel that it’s unfair that wealth is skewed in favour of such rich people. You may secretly feel that those people are amassing wealth that belongs to you. Well, you’re wrong. You’re rich af too. Stop kidding yourself.
Most of my social circle identify themselves to be middle class or ‘upper middle class’ — to be the upholders of moral virtue in society, immune from the perils and temptations that come with excess money. In our view of the world, we’re always the victim — the one that doesn’t get a promotion at work, the one that isn’t able to afford a luxury sedan, the one that can’t travel to exotic locations.
We are not the victims. We are in fact on the side that has benefited and continues to benefit from the income inequality that is worsening in this world.
If you live in India and your family of four together makes 30 lakhs INR, you are in the richest 2.0% of the world’s population.
If you live alone in the United States and you make $100,000, you’re in the richest 0.2% of the world’s population.
Why don’t you check how rich you are by using this calculator.
As the gap between the rich and poor widens in the world, you’re definitely on the side that is getting richer. Though it’s tricky to define the Indian Middle Class, Krishnan & Hatekar in 2017 defined the Indian Middle Class as those who earn a daily income of between $2-$10. In other words, if you earn more than 25,000 INR per month, you’re definitely affluent — though you might not feel that way since the sample you compare yourself with are those even more affluent than you.
Consider the below chart,
If you earn more than 14 lakhs INR in India, you are part of such a small minority in India that you are not even highlighted in the chart above (~$66+/day).
However, if you’re rich in a country like India, it doesn’t mean everyone else is poor. In fact, most of India (and the world) is coming out of poverty (though that may seem counter-intuitive). If you track income distribution in India from 1947 to 2015, you’ll notice something heartening. At independence, 60% of the Indian population was in extreme poverty. Today that has dropped to ~12%. Take a look at the transition below.
Pretty impressive, right? Maybe, the world is not such a bad place after all.
I understand that was a lot of information. Let’s do a recap.
Broadly in the world and India,
- There is worsening income inequality. Wealth distribution follows a logarithmic scale and confines to the Pareto Distribution.
- However, most people are in the middle-income category and have escaped extreme poverty.
- If you own a car or a house or both, you are affluent and are in the single-digit minority benefiting from the increasing inequality in the world. You’re not middle class. You’re not the victim.
The source of this inequality arises from how our current economic system is structured. The economy is based on trust. We lend money to banks trusting them to keep it safe. Banks then lend it to companies whom they trust will create something productive in the future. To ensure the trust is rewarded, we have evolved powerful incentives for entrepreneurs and business executives. Thus, those driving innovation are rewarded with maximum wealth.
This worked well if companies were socially conscious and were focused on maximising benefits for everyone — the employees, the suppliers, the community, the environment. However, there was a shift in this thinking in the 1970s, triggered primarily by an article by economist Milton Friedman in the New York Times on September 13, 1970. Friedman argued that any business should only focus on one thing — their shareholders i.e the sole purpose of any business is to make money. Friedman went on to become a Nobel Laureate and the leader of the Chicago School of Economics, providing a convenient justification for large corporations to turn selfish and become solely focused on short-term paths to profits.
Greed became a celebrated virtue.
This led to the rise of crony capitalism. This led to tax havens. The rich (including you and me) found ways to evade tax and shore up more wealth. Corporations now aim to drive higher returns to those at the top by cutting costs at the bottom. When the corporations and the rich dodge taxes, it leads to less wealth available for redistribution and increases income inequality.
What can we do about all this?
There is a need for governments to cooperate better with each other to reduce tax evasion globally. This will help them redistribute wealth more efficiently in their respective nations. There are some glimmers of hope in this regard from developments such as the European Union directing Apple to pay $14.3 billion to Ireland over unfair tax practices.
Individually, we can make a difference by first recognising where we are on the income graph — we are affluent, which means we have wealth that we must redistribute.
You can redistribute wealth in many ways. One of the less popular methods is to stop whining and pay your taxes. Yes, there is a lot of leakage in the government system but social welfare provided by the government is one of the most effective ways to reduce inequality in society.
Another way is to donate your excess wealth to a good cause. It, however, doesn’t go far when you donate to the beggar on the street or to random organisations. Make sure you donate effectively to organisations that are proven to make an impact. GiveWell is a charity evaluator which conducts research on the impact of the money given to different charities. For example, GiveWell estimates that for every $7500 donated to the Against Malaria Foundation, one life can be saved. If you’re earning well in the US, donating less than 10% of your annual income can save a life every year.
Unfortunately, such reliable research hasn’t been conducted into charities in India. The best way to redistribute your wealth in India, in my opinion, is by sponsoring a child’s education. There are hundreds of children out there looking for someone to sponsor them and even if the child doesn’t turn out to be the next Einstein, you would help them develop into an individual who will have a positive impact on society.
Inequality is rampant. We’re benefiting from it. We can also play a part in reducing it. It all begins with self-awareness.
I’m pushing myself to write to better structure my thoughts and to engage with like-minded people. Liked what you read? Leave a clap and let me know what you think in the comments.
Also, if you have any good ideas with regard to redistributing one’s own wealth, let me know in the comments.