What rich countries get wrong about poverty

It’s astounding just how unequally wealth is distributed around the world. in 2015, according to calculations by Oxfam, just 62 people had the same amount of wealth as the poorer half of humanity – 3.6 billion people. Those 62 people are incredibly rich, to be sure, but it’s also the case that the bottom half of the world is desperately poor. To be among the wealthiest half of people in the world, a person needed to have only $3,210 in net assets (minus debts) in 2015, Oxfam says.

The concentration of wealth into the hands of a few people is a serious issue, and it can be tempting to blame that double-decker busload of fantastically rich people for the poverty and inequality around the world today. But new research by Caroline Freund, a senior fellow at the Peterson Institute for International Economics, shows that, in many cases, blaming the super-rich for global poverty would be a mistake.

This idea may come as something of a shock for people in the West, especially liberals, who are used to looking at economic problems through the frame of inequality. But in a new book, “Rich People, Poor Countries,” Freund argues that for much of the world, the big problem isn’t inequality – it’s poverty.

Far from keeping other people down, many new billionaires in emerging economies have become rich by founding companies, Freund says. Those companies catapult them to wealth, creating inequality in those countries -- but they also create new jobs and industries, and help lift many others out of poverty. Freund chides Western policymakers for seeing the world’s economic problems in terms of inequality, saying that the practice “appears to reflect an Anglo bias, as it is largely in the English-speaking world that these trends are especially pronounced.”

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In her book, Freund carefully analyzes global rich lists and breaks the world’s billionaires down according to how their fortune was accrued. She divides billionaires into two main categories: those who inherited their wealth, and those who made it themselves. Then, she breaks the latter category, self-made billionaires, into several more categories to help judge what kind of broader influence their wealth might have had on society.

She argues that company founders and executives -- people such as Bill Gates, co-founder of Microsoft, or Jack Ma, founder of the Chinese e-commerce giant Alibaba -- have helped create the most jobs and economic growth for those further down the income ladder. Billionaires who make their money in finance and real estate are a little more mixed, Freund says; not all are genuine innovators, though some are. Finally there are those who make their money based on political connections, the privatization of government assets, or natural resources, who in general contribute less to raising living standards for others.

Freund's chart below shows how these categories of self-made wealth compared with inherited wealth, in both advanced and emerging economies. You can see that, in both cases, significantly more billionaires have made (blue, green and purple) rather than inherited (red) their wealth.

Over the past two decades, new growth and dynamism in emerging-market economies has led to a shift in how wealth is distributed. In emerging markets, the proportion of billionaires who inherited their wealth actually fell by half between 2001 and 2014, while the proportion who made their own wealth rose. And much of that growth in self-made billionaires in emerging markets was due not to government connections or the exploitation of natural resources but accrued to company founders and executives.

The picture is less dynamic -- and more worrying -- in advanced economies. The proportion of self-made billionaires also rose between 2001 and 2014, while the proportion of inherited billionaires fell, though less sharply than in emerging markets. And much of the growth in self-made billionaires was due to wealth related to finance and political connections, which may be less beneficial for advanced economies.

[Income inequality has squeezed the middle class out of the majority]

Taken together, these trends mean that inequality in advanced countries looks a lot different than inequality in the emerging markets. “To put it another way,” Freund says, “Jack Ma’s compatriots have seen their incomes grow alongside his own; Bill Gates’s have not.”

People often associate wealth in emerging markets with crony capitalism, but Freund’s accounting shows that isn’t exactly true. Before the 2000s, most of the super-rich in poorer countries had made their wealth through natural resources, government connections, monopolies or privatizations – or they inherited it, Freund says. But in the past 15 years, the growth of consumer markets and innovative companies in countries such as China, India, Indonesia and elsewhere have changed the picture. Rent-seeking activities still account for about a fifth of emerging-market fortunes, but in the last 15 years there has been a remarkable growth in the wealth of company founders and executives in emerging markets.

Put simply, emerging-market industries are reshaping the world. In 2004, 20 percent of Forbes’ global billionaires were from emerging markets. A decade later, the figure had risen to 43 percent.

Not all emerging economies look the same, of course. Here is how Brazil, Russia, India and China compare. Many of Russia's billionaires made their wealth through natural resources or political connections, while China's billionaires are much more tied to entrepreneurship. Brazil and India are somewhere in between, with much more inherited wealth.

In countries such as China, where company founders and executives make up a large proportion of billionaires, new companies have come to employ many thousands of people, resulting in greater wealth for those further down the income ladder. In China, knowledge- and technology-intensive industries account for one-fifth of the economy, and the vast majority of that activity comes from private firms.

Freund compares the rise of big business in emerging markets to the growth of industry in the United States and Europe in the late-19th and early-20th centuries, as well as the rapid modernizations of Japan after World War II and South Korea in the 1960s and 1970s. In these transitions as well, the emergence of extreme wealth was part of a development process that lifted overall living standards.

Inequality is still an important issue around the world – but it’s not the only measure that matters when we think about global equity, says Freund. Especially in poorer countries, the more important metric is whether living standards for the poor are actually getting better.