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Global income shows positive movement

We seem to really enjoy contemplating the money and lifestyles of the top 0.01 percent. The wealthiest Americans garner immense mind-share in the imaginations of the rest of the populace. We incessantly track the incomes of hedge-fund managers and other finance stars, the heirs to the Wal-Mart fortune and other $100 billion families. Don’t forget the Bloomberg Billionaires Index and the Forbes 400 and the wealthiest New Yorkers.

We are, in short, fascinated with other people’s wealth.

What about the rest of the income strata? As it turns out, there is a fascinating story there as well.

It may not be as glitzy and luxe as the Billionaires Index, but it is a tale of gradual improvement. So says a recent data analysis on the Global Middle Class by the Pew Research Center.

The good news is that during the first decade of the 21st century, about 700 million people were lifted out of poverty. That is a 14 percent reduction in poverty.

The bad news is that moving into, and staying within, the global middle class is a significant challenge.

The study found that 71 percent of the global population is either poor (15 percent) or low income (56 percent). The middle class is only 13 percent of the total population.

To put some hard numbers on those percentages, with a world population of 7.2 billion humans, about 936 million are middle class. A little more than a billion (1.08) are impoverished, and more than half the world’s population, a giant 4.03 billion people, are low income.

The Pew report contains some astonishing data points: 84 percent of the world’s population, including those defined as middle class, lives on less than $20 a day. Surviving on the maximum in the U.S. or Europe would be difficult for an individual – about $7,300 a year.

Pew divided the world’s population into five groups: Poor, low income, middle income, upper-middle income, and high income.

Less than $2 in daily per capita income is considered poor, based on data showing it takes that much to meet bare minimum human needs.

Low income is between $2 and $10, and to be part of the global middle-income group takes $10 to $20 a day. Note that for a family of four in the U.S., the poverty line is about $16.65 a day per capita.

Income of $20 to $50 a day puts you in the upper-middle income range.

More than $50 a day, or about $73,000 a year for a family of four, and you are in the global high income group.

It is noteworthy that while $10 is the lower threshold for middle-income status, it is about the median daily per capita income of U.S. households living in poverty. Pew reports that “a large share of poor people in the U.S. would also fail to meet the global middle-income standard.”

For readers who may not normally consider this demographic data, let me put this into a context that you may find more interesting or relevant. Each of these demographic and economic subgroups represents an enormous market for your favorite companies.

Consider the 71 percent of the world’s population that falls into the poor and low-income categories. This group devotes a very large share of its income to food, medicine, clothing, housing, education and energy. It therefore represents a huge market for basic goods and consumer staples.

Think of it another way. More than fourth-fifths of the world’s population live on less than $20 a day. In other words, how well this vast swath of humanity is doing will have important implications for industry, from health care and finance to agriculture and energy.

Income growth in these groups in both the developing and developed world will alter the economic and political landscape. The U.S. National Intelligence Council has called it a global megatrend.

Not to be too optimistic, but the economic state of the world is getting better. As more people move into the global middle class, they are able to buy more consumer goods, save and invest. That creates a long-term self-interest in political stability and, one can hope, democratic institutions.

How well we adapt to these changes will determine how successful we in the U.S. are as investors, and as a nation.

Barry Ritholtz, a Bloomberg View columnist, is the founder of Ritholtz Wealth Management. He is a consultant at and former chief executive officer for FusionIQ, a quantitative research firm.

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