Davos Dreaming: Development without Development

It's that time of year again when presidents, CEOs and civil society leaders get together at the World Economic Forum in Davos, Switzerland, leaving the rest of us to wonder whether it is really true that a small number of very rich people at the top of the income distribution own more than the bottom half of the world.

Oxfam’s annual Davos calculation declaring that “the top [X] people have the same amount of wealth as the bottom 3.5 billion,” followed by responses from various skeptical commentators, is in danger of becoming a January tradition. (See for example Ezra Klein, Chris Giles and Felix Salmon and for a response to their criticisms, Nick Galasso). This year’s calculation from Oxfam says X=62.

Defenders of this killer fact argue that quibbling over the numbers is besides the point; it is a useful headline to attract attention to the disparity between the world’s richest and poorest.

But the neat and shocking equivalence between the wealth of a Davos shuttle bus-load of billionaires and that of half the world’s population may also be beside the point. The calculation works not because 62 people own the vast majority of everything (they don’t), but because 3.5 billion people own barely anything. Both groups own less than 1% of the world’s wealth. 

It is all too easy to overestimate the development dividends from morally satisfying policies.

The bottom 3.5 billion are those with less than $3,210 in personal net assets. The vast majority live in low and middle income countries where being asset-poor means having limited access to healthcare, education, job opportunities, security, and justice. As Branko Milanovic says, "only in rich countries can wealth-poor people live reasonably good lives." In other words, Oxfam’s neat statistic on inequality may simply reflect the persistent problem of poverty and underdevelopment.

Inequality can undermine development and entrench poverty. Unequal access cements privilege and exclusion into the design of institutions and markets and prevents productive use of assets. Income inequality can be a sign that people at the top are abusing market power and controlling assets in illegal or unethical ways. Extreme inequality can lead to cycles of political and economic instability. 

But the danger of focusing the inequality debate on the disparity between the global ultra-rich and the bottom 3.5 billion is that it ignores national policies and politics. It gives the impression that extreme wealth in the North and pervasive poverty in the South are simply two sides of the same problem — solve one and you can solve the other. 

Rich people and multinational corporations make for attractive and accessible villains in a world where global value chains are seen to be pervasive and immiserizing. But the reality is that levels of income remain largely dependent on where people live in the world, and that poor people are not so much exploited by globalization and international capital markets as they are excluded from it.

It is all too easy to overestimate the development dividends from morally satisfying policies (as we have seen in tax debates). The desire to "even it up" implies that we can have “development without development,” by simply redistributing assets from rich to poor. Effective taxation is important but countries become wealthier through technology absorption, increases in productivity, and the adoption of the rule of law. Oxfam is right to take a critical view of the financial system, global supply chains, intellectual property rights and international tax rules, and to question whether they are fit for purpose. The challenge is to develop rules and institutions that are designed to promote inclusive growth, rather than to punish or constrain it.