Understanding the impact of relative poverty
IT MATTERS … because the widening wealth gap hurts sustainable economic performance
The increasing relative poverty worldwide is a severe risk for both developed and developing nations, with the issue set to worsen significantly if no effective actions are taken to address it.
Many responsible investors are now trying to reduce wealth inequality by looking beyond traditional means, such as community development banks and affordable housing, to new ideas such as food quality and access to clean water. UBS Group AG, for example, is directing at least $5 billion of client assets over the next five years into new impact investments that focus on the United Nations Sustainable Development Goals, 17 ‘global goals’ that aim, among other things, to end poverty and hunger, improve access to education and healthcare, and make cities more sustainable.
These less direct services are crucial in increasing opportunity and quality of life, which then reduces relative poverty.
Relative poverty is about expectations. Embedded in social and cultural expectations across the world is the basic goal of having a home and a family. However, as inflation increases without an equal increase in salaries, the working middle class are falling further behind while, at the other end, the rich get richer.
This division is visible in many places, such as in China, where the economic boom has lifted hundreds of millions of people out of extreme poverty but has created greater wealth inequality than ever before. And in the US, a majority of youth believe that the system is “rigged”. When people start to believe that the system that worked for their parents will not work for them, there will likely be a spike in societal discontent and unrest.
In Singapore, around 26% of households earn less than SG$3000 (US$2155.79) – the amount economists say is needed for a person to avoid being socially excluded.
And in South Korea, 15% of the population live below the poverty line of KRW20 million (US$19,179).
China has had some success when it comes to poverty alleviation, as the second largest economy in the world accounts for 70% of global poverty reduction over the past decade. However, wealth distribution is far from even. Most of the country’s resources go to first-tier cities such as Shanghai and Beijing. A lot of people who were lucky enough to ride the wind of China’s economic growth became very rich very fast, but for many people living in rural areas and less developed cities, relative poverty is absolutely getting worse.
Such disparity can lead to mass unemployment, as has been experienced in Southern Europe. In Spain, for example, more than 40% of youth are unemployed, which will likely lead to a vicious cycle of exacerbated inequality. The situations in these countries are a warning for nations in Asia that are heading in the same direction, and because of the immensity of the issues, the need for private capital to fund services focused on alleviating inequality is urgently needed.