Riding for a fall
Although tough global economic conditions are leaving their traces on both the rich and the poor, the gap between the two is widening at break-neck speed.
Wael Gamal draws contrasts from two recently published reports
"Poverty is a complex, deep-seated, pervasive reality. Virtually half the world -- nearly three billion people -- live on less than $2 a day. Among those, one billion people struggle along on $1 a day or less," an International Labour Office (ILO) report, entitled "Working out of Poverty", said.
Meanwhile, in 2002, the number of high-net worth individuals (HNWIs) with more than $1 million in financial assets increased by only 2.1 per cent or 20,000 people -- the lowest in seven years -- according to the World Wealth Report 2003. However, the wealth of HNWIs increased by 3.6 per cent in 2002 to reach $27.2 trillion, compared to a three per cent increase in 2001 that brought the number to $26.2 trillion.
The World Wealth Report, issued by Merrill Lynch and Cap Gemini Ernst & Young, is an annual series that investigates and analyses key trends and developments in the global HNWI market and highlights the implications for the wealth management industry.
The Middle East is a stark example on both sides. "The number of people in the Middle East living at or below the $2 a day line rose from 50 million to nearly 70 million in the 1990s," the ILO report said. At the same time, according to the HNWI report, "the number of HNWIs increased by 4.7 per cent -- nearly double the international rate -- to 300,000 people in 2003 alone. Total HNWI wealth rose by 4.6 per cent, compared to an international rate of only 3.6 per cent, to reach $1.1 trillion."
The Middle East example is an extreme manifestation of a global phenomenon. Inequality within many countries and between the richest and poorest worldwide has grown exponentially over the last few decades. The ILO report notices that "in 1960, the income gap between the wealthiest fifth of the world's population and the poorest fifth was 30 to one. By 1999, it was 74 to one. In 1995, average per capita GDP in the richest 20 countries was 37 times the average in the poorest 20, a gap that has doubled in the past 40 years."
A large proportion of people living in extreme poverty live in countries that are themselves economically and socially excluded. In 2002, the United Nations Conference on Trade and Development (UNCTAD) estimated that 81 per cent of the population of the least developed countries (LDCs) lived on less than $2 a day and 50 per cent on less than $1 a day. But developed nations were not immune from this global phenomenon. In 20 industrialised countries, over 10 per cent of the population, on average, was living below the poverty line in the mid-1990s.
The year 2002 was a difficult one. With the world economy at the edge of recession, the US economy going through its worst phases in years and the German and Japanese economies in decline, political instability made financial markets increasingly volatile.
The effect on the rich was slower accumulation of wealth compared to the 1990s. Financial market capitalisation decreased by 16.9 per cent in 2002, said the HNWI report. Most investors diversified their investments to evade risks, isolated their assets from volatile environments and adopted a realistic view of the financial world. "To protect their wealth, HNWIs shifted into fixed income, cash and deposit products and physical assets [particularly property]. They moved their money to alternative investments, such as hedge funds, which tend to be non- correlated with stock market returns," the report said.
Meanwhile, HNWIs in less- developed countries did better than their counterparts in the developed world. Responding to higher savings rates and lower integration levels in the international market, HNWI wealth in non-G7 countries went up 4.7 per cent, compared to only 1.9 per cent for G7 countries.
The consequences for most people living under the poverty line are bleak, the ILO report said. "For individuals, poverty is a nightmare. It is a vicious circle of poor health, reduced working capacity, low productivity and shortened life expectancy. For families, poverty is a trap. It leads to inadequate schooling, low skills, insecure income, early parenthood, ill health and early death. For societies, poverty is a curse. It hinders growth, fuels instability and keeps poor countries from advancing on the path to sustainable development. For all of us, and for all these reasons, the cost of poverty in shattered human lives is far too high."
The continued acceptance of this state of affairs expresses a loss of fundamental human values, the report said. "There is no safety net and little state support. After all, the poor do not cause poverty. Poverty is the result of structural failures and ineffective economic and social systems. It is the product of inadequate political responses, bankrupt policy imagination and insufficient international support."
The HNWI report expects modest economic recovery through 2003. HNWI wealth is to rise by an average of eight per cent a year, reaching $38.5 trillion in 2006. While HNWIs may be reluctant to increase their investments in equities in the short term, growth rate projections reflect the belief that despite a difficult time, global GDP and the stock markets have exhibited significant underlying powers of recovery. As that strength reemerges, HNWIs will once again invest more confidently in this core asset, fuelling their wealth growth over the longer term, the report stated. HNWI wealth is expected to average seven per cent annual growth over the next five years, reaching $38.5 trillion by year-end 2007.
Meanwhile, the ILO report opines that poverty elimination is impossible unless the economy generates opportunities for investment, entrepreneurship, job creation and sustainable livelihoods. "The principal route out of poverty is work," the report said. "Official unemployment, which continues to rise, masks the even larger problem of underemployment and billions of people unable to work in ways that fully maximise their productive potential. The work of the poor is largely invisible. Far too much of women's work is still uncounted and undervalued. And the greatest failure of the current system is for young people who see no future."
