Laying the Groundwork for Growing Giving

THE POLARITY OF WEALTH IS CHANGING

Over the past 40 years the world has become wealthier and more equal; fuelled by the rise of South East Asia as an economic power.

CONTENTS

This 2017 report discussed the potential impact of middle class giving across the globe and the challenges ahead.

Executive summary
The polarity of wealth is changing & the rise of the middle class
The importance of middle class giving & quantifying the potential of middle class giving
The urgent need to drive a culture of giving
Recommendations and references

THE POLARITY OF WEALTH IS CHANGING

Six of the seven largest economies in the world by 2050 are projected to be nations currently seen as emerging economies, with China (projected to be 1st), India (2nd) and Indonesia (4th and not currently in the top 10) turning the legacy of the 20th century economic order on its head.[3] Indeed, according to PwC, key emerging markets (E7) could grow around twice as fast as key advanced economies (G7) on average.[4]

The story of global wealth creation is in perhaps its most compelling chapter yet. Over the past 40 years the world as a whole has become both wealthier and more equal; fuelled to a large extent by the rise of South East Asia as an economic power.

However, the story of inequality within nations is rather different. For much of the rich world, the first half of the 20th century saw the gap between rich and poor close, but since the 1980s the richest 1% has claimed a larger and larger share of GDP in countries such as the United States, United Kingdom, Canada, Ireland and Australia[5] with the proportion of wealth residing in the “middle tier” actually shrinking from 62% to 45% over the past 40 years in the USA for example.[6]

Driven by global competition for investment, many emerging economies are taking advantage of their lower labour costs, leaner government and more permissive regulatory environments to offer generous tax breaks and low rates of taxation overall. This is leading to an explosion of wealth, but also fuelling inequality.

Between 2006 and 2016 the number of Ultra-high net worth individuals (UHNWIs)[7] grew globally by 42%, from 136,200 to 193,490. This growth is set to be maintained, with Knight Frank estimating that between 2016 and 2026 the number of UHNWIs will grow by 43% to reach 275,740.[8] Just eight men now own the same wealth as the 3.6 billion people who make up the poorest half of humanity.[9]

GGG 1 fig 1 UHNWI population worldwide

A historic trend for labour income to represent an ever smaller proportion of economic production compared to income from capital has been evident ever since comparative data became consistently available for many countries in the 1970s. Between 1975 and 2012, 42 of 59 countries analysed saw such a trend with only nine seeing an increase in the labour share of income.[11]

Some economists, most prominently Thomas Piketty, have argued that this trend is likely to continue based on a historical analysis of capital performance which finds that capital outperforms wider economic growth rates. [12]

This has led normally economically liberal institutions to warn of the potential consequences of growing inequality. For instance, the International Monetary Fund has stated that inequality should be tackled not only because it is “ethically undesirable but also because the resulting growth may be low and unsustainable.”[13]

GGG 1 fig 2 global income growth incidence curve

However, while inequality is certainly a pressing issue, it should also be more widely recognised that the most striking story about global wealth creation in the world today is that of the rise of the middle classes. As Fig 2 shows, whilst the world’s upper-middle income population has seen incomes stagnate, those in the lower, and particularly in the middle percentiles have seen dramatic growth.

THE RISE OF THE MIDDLE CLASSES

At the global scale, arguably the most striking story of the past 40 years is not that of globalisation, conflict or technological advance but of the raising of billions of people from below the poverty line to ultimately enter the middle classes.

As demonstrated by Max Roser and One World in Data in Fig 3, the world has moved on from the “two humped” world of the 1970s and 1980s, which was characterised by a small breakaway subset of the population in the rich world experiencing rapid economic growth whilst the rump of the worlds population remained below the poverty line. By 2015, the world had returned to a single hump formation with wealth beginning more closely to fit normal distribution models.

Strikingly, in the process of returning to normal wealth distribution, the whole world became wealthier with a huge amount of people entering the global middle classes.

GGG 1 fig 3 Global income distribution in 1888, 1975 and 2010

This dramatic growth in middle class income has largely occurred in emerging economies rather than what has traditionally been thought of as Western or advanced economies – a distinction that will soon seem anachronistic (if it is not already).

CAF’s 2013 report, Unlocking the potential of global philanthropy [16], used projection data from a report by Homi Kharas[17] on the likely growth in spending of middle class people by 2030 to estimate the potential value of charitable giving amongst that group were it to match the proportion given in certain countries today. Kharas’s research works particularly well because it uses a definition of middle class that would neither include households considered to be rich in poor nations, nor those that would be seen as poor in rich nations.[18] In 2017, Kharas published an update to his projection [19] which allows us to follow suit.

GGG 1 table 1 spending by global middle class

Table 1 displays data from Homi Kharas’s 2017 updated projections on the growth of middle class spending. It reveals that his 2010 projections have not only been met but actually exceeded with real values for 2015 in the new report almost meeting the 2020 projections in the 2010 research paper. As a result, the projection for global middle class spending by 2030 has been revised upwards from $56 trillion to $64 trillion – almost double what it was in 2015.
    

GGG 1 Fig 4 projected growth of middle class spending
GGG 1 Fig 5 location of middle class wealth

As can clearly be seen in Fig 4 and Fig 5, a considerable amount of this new middle class wealth – 88% of it in fact – will be created in the Asia Pacific region.

The rapid growth in wealth in the region, and China specifically, means that by 2015 it was home to 35% of the world’s middle class households. By 2030, it will be home to more than half (57%).

We are experiencing a clear shift in the polarity of wealth from the North West to the South East as millions of people move from a lifestyle of subsistence to that of holding discretionary income.

Part 2: Importance of middle class giving and quantifying potential