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Are you rich or poor?

21 May 2015
by Brian Keeley

In it togetherIn a world where wealth reports and rich lists regularly occupy the headlines, most of us have surely asked ourselves where we sit on the spectrum that starts with struggling to get by and ends with Bill Gate’s estimated fortune of $79 billion.

If you think you already know the answer, think again. Research indicates that many of us have only a vague idea of how our income compares to that of our neighbours. For example, in France in 2011 about three out of five poor people thought they were better off than they were. Conversely, about four out of five rich people didn’t appreciate just how well off they were.

Similarly, many of us don’t have a strong sense of the income gap in our own countries. Americans, for example, typically think the gap between rich and poor is smaller than it is. On the other hand, people in a number of European countries, such as Hungary and Slovenia, often think the gap is wider than it is.

If these questions have been on your mind, we have some good news. From today, a new OECD research tool lets you get some hard numbers on whether you’re rich or poor. Simply type in where you live, your age and your income, and Compare Your Income will tell you where you stand on the income scale in your country – up there with Mr. Gates or … well, down here with the rest of us.

Share of the pie

But the tool goes further that. It also lets you check if your sense of where you stand in relation to everyone else is accurate – you may be pleasantly surprised or sadly disappointed. More broadly, it also explores your understanding of how income is distributed in the country where you live.

Over the next few years, the anonymous and confidential responses that users provide to Compare Your Income will be used by the OECD to develop a clearer picture of people’s perception of wealth, poverty and income inequality in OECD countries. That, in turn, will feed into future analysis of income inequality – an issue that has “moved to the top of the policy agenda in many countries,” according to In It Together, a new OECD report that’s also released today

Given current trends, income inequality is likely to remain a top policy item for some time to come. As In It Together notes, the gap between rich and poor is now at its highest level in 30 years in most countries. Today, the top 10% earns 9.6 times the income of the poorest 10%; back in the 1980s, the ratio stood at just 7 to 1.

But there’s perhaps a sense in this latest OECD report that the focus of the debate is shifting – from top earners, the so-called 1%, to a large swathe of low earners, or what might be called the bottom 40%. In recent decades, these low earners have gained little from economic growth in many OECD countries and, in some cases, have seen real falls in their incomes.

As we discussed here on the blog last year, OECD research indicates that the declining economic power of this bottom 40% of low earners is bad not just for them but also for the overall economy. The research shows that when the gap between rich and poor grows, lower earners invest less in education and skills. By contrast, there is little or no change in how much middle and high-income families invest. The consequence of this underinvestment is a smaller talent pool for the economy, which, in turn, slows growth.

The new report adds further detail to this research and also looks at some of the factors that are weakening the situation of low earners, including growing concentration of wealth – as opposed to income – and the decline of “traditional” employment. We’ll return to some of these subjects soon.

Useful links

In It Together: Why Less Inequality Benefits All is the third in a series of OECD reports on income inequality. The previous titles are Growing Unequal? (2008) and Divided We Stand (2011).

OECD work on income inequality and poverty

OECD Income Distribution Database

Counting cranes, hidden debts

20 May 2015
by Brian Keeley
How many cranes can you see?

How many cranes can you see?

When visitors to Chinese cities are trying to take the pulse of the local economy, they often do a very simple thing – they look out the window and count the cranes.

Crane counting is a trick used by analysts from London to Sydney to get a real-time sense of economic activity: Cranes mean construction, construction means jobs, jobs mean people have money to spend, and so on. In China, however, crane counting can be hard – sometimes there are so many you lose count. That was especially true in the years following the financial crisis, when China launched a massive investment programme, estimated at the time at around $560 billion, to stimulate the economy.

Much of the money went into infrastructure. The result? Even more cranes. Less visible, however, were the sources of some of the money to pay for all that building. That was particularly so when it came to financing from local governments, which often resorted to highly convoluted methods to raise funds. The result today is a legacy of local-government debt that, in some places, is as muddy as a building site.

Why is local government borrowing in China so opaque? There are many reasons. One is that, unlike their counterparts in many other countries, local governments in China can’t raise funds directly by issuing their own bonds. Instead, most have borrowed through specially created arms, usually known as local government financing (or investment) vehicles (LGFVs). These entities are owned or controlled by local governments but operate at arm’s length. As a result, much of local government borrowing has been kept off the balance sheet.

Another reason is that, as well as borrowing from banks and issuing bonds, many of these financing vehicles raised funds through shadow banking. That’s a term used to describe the whole host of financial institutions that provide loans but, unlike traditional banks, don’t rely on deposits to finance their activities. Crucially, and this explains the “shadow” bit, they’re not regulated like normal banks.

Shadow banks are found all over the world, not just in China. Despite their sinister-sounding name, they are not “fearsome, toxic creations,” say Andrew Sheng and Ng Chow Soon of the Fung Global Institute. However, as they also point out, some shadow banks in China, as in other countries, have promoted “opaque, usurious lending and cross guarantees that bundle shadow banking credit risks with the formal banking system, with significant moral hazard issues”.

Chinese investors got a taste of what can go wrong last year, with the default of a “trust product” created on behalf of Jilin Province Trust Company, an LGFV. As the Financial Times (paywall) notes, such products “lie at the heart of China’s shadow banking sector”. They’re complicated beasts, but essentially trust products represent a security backed by a bundle of assets – such as property, loans or shares. They can be attractive for wealthy investors because they can pay a high rate of interest. But they’re also distinctly risky.

So, how big is the local government debt pile? According to the OECD’s recent Economic Survey of China, it was approaching 30% of GDP in mid-2013. However, the numbers are reported irregularly, so the figure by now is probably higher. Estimates are complicated by the opaque nature of local-government borrowing. Indeed, it isn’t arguably the scale of the borrowing that matters so much as the fact that it’s hard to say with certainty where the risks lie.

There’s no question that local government finances – and, indeed, rising debt more widely – are a concern in China. In March, for instance, the central government sent a strong signal by announcing a debt-for-bond swap programme to help ease the repayment pain of local governments, and further action seems imminent. Despite the concern, there also seems to be a feeling that the risks are – as both the OECD and the consultancy McKinsey & Co put it – “manageable”.

However, the OECD survey also urges reforms to transform local government financing, including improving budget management and introducing greater transparency, for example by allowing local governments to raise funds through bond issues. It also advises that debt should be added to the indicators used to evaluate the performance of officials in local governments “to reduce incentives to borrow unwisely”.

Useful links

2015 Economic Survey of China

20 years of China and the OECD working together

中国和OECD迎来20年合作伙伴关系

OECD work on China

网站 【中文】 (The OECD’s Chinese-language site)

China meets the ‘new normal’ (OECD Insights blog)

The OECD Policy Framework on Investment

 

 

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