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Responsible spotlight - November 2023

3 months ago
Roundel Responsible Spotlight

Factfulness – Things aren’t as bad as they seem, with exceptions

The 2018 bestseller ‘Factfulness’ by Hans Rosling seeks to counterbalance some of the pessimism about the state of the world. It provides numerous examples of how global trends are continuing to improve. The author believes that humans’ dominant negativity (the tendency to notice bad things more than the good) has been a major contributor to “the world is getting worse” narrative.

In 1966, half of the world’s population lived in poverty ($2 per day). By 2017, this proportion had fallen to 9%, and had halved in the twenty years before Covid. Over the past few decades, other examples of progress include higher levels of girls in primary age education, child cancer survival rates and wider access to electricity. 

Wealth and income inequalities remain

An area where progress has been mixed has been in wealth and income inequality. One of the United Nations’ 17 Sustainable Development Goals focusing on wealth inequality (‘the wealth gap’) shows how wealth (defined as all assets owned by an individual) is distributed between the richest and the poorest in a country. Income inequality is usually shown by the Gini index, whose scaling reflects perfect equality i.e. everyone has the same income (0 or 0%) or perfect inequality (1 or 100%).

Pre-pandemic, significant progress had been made in reducing global inequality according to the World Bank, with the worldwide Gini falling (i.e. improving income equality) from 70 in 1990 to 62 in 2019. This reflected a narrowing of income inequality in many poorer countries, resulting from their faster rates of economic growth from a lower base. Yet alongside this overall improvement, already high levels of income and wealth inequality in some advanced and major emerging economies rose. This occurred in the US, China, India and Russia. Analysis in the 2022 World Inequality Report suggests that the gap between the average income for the top 10% and the bottom 50% within countries across the world has almost doubled over the past couple of decades from 8.5x to 15x. Inequalities within countries are now even greater than between them.

What’s driving intra-country inequality?

Rapid technological change is reshaping business and how we work. Future demand will likely concentrate on fewer employees with higher level skills working alongside high levels of automation. Consequently, there will be less need for a broader set of workers in the low or middle-level skills category. The CEO-to-worker compensation ratio for the largest publicly owned US companies in 2021 was just short of 400x, compared with a ratio of just 20x in 1965. This wealth compartmentation has meant that by mid-2023, 69% of the total wealth in the US was owned by the top 10% of earners, while the lowest 50% of earners only earned 2.5%. 

The pandemic widened the gap

Global inequalities were one of the many things made worse by the pandemic, with the Bloomberg Billionaires Index recording 131 billionaires who more than doubled their net worth over the period. At the same time, the World Bank’s global poverty rate (defined as those earning less than $1.90 a day), climbed in 2021, compared with its pre-pandemic level. What happened?

During the pandemic, central banks provided capital while governments introduced tax breaks and financial incentives, as they did during the 2008/9 global financial crisis. Some of this capital found its way onto the financial markets where it inflated asset prices and boosted the holdings of those with the wealth, although it wasn’t matched by comparable improvements in productivity. At the same time lockdowns affected many low paid workers, especially women. In the UK, the bottom 10% of earners were seven times more likely to work in sectors that were shut down by the pandemic (hospitality, transport) vs. the top ten 10%. At the trough of the pandemic in 2020, 40% of workers in Mexico were laid off or did not have their contracts renewed, compared with 8-9% in Japan and Korea.

Roundel 1

Architas view

The rise of artificial intelligence and related technology/automation is likely to increase intra-country inequality. While these technologies may lead to greater productivity and wealth, they could also weaken demand for a range of roles, not just those historically perceived as manual or poorly paid. More aspirational roles in technology, media, law and finance may also prove vulnerable.

Automation may also exacerbate inequality between countries, with implications for emerging economies. Relatively low wage and low skilled workers underpin their economic growth models and new sources of competitive advantage may be needed. More broadly, globalisation has demonstrated how shocks such as the pandemic and the economic fallout from the war in Ukraine have far reaching effects which affect the most vulnerable.

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