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.