Oct 02, 2016

Fallacy of Hating the Rich

Along the Altamount Road in South Mumbai, stands the world’s most expensive private residence, Mukesh Ambani’s home — Antilla. Completed in 2010, the billion dollar home runs 27 storeys high with six floors solely dedicated to cars. It sports a health spa, a salon, a ballroom, and a 50-seat movie theatre and employs a staff of six-hundred for its upkeep.

But a construction like Antilla upsets a fairly large number of people including prominent industrialists like Ratan Tata who called it a showcase of lacking empathy for the poor. In an interview to The Times, he said —

The person who lives in there should be concerned about what he sees around him and [asking] can he make a difference. If he is not, then it’s sad because this country needs people to allocate some of their enormous wealth to finding ways of mitigating the hardship that people have.

The sentiment is understandable — after all, the irony soars high of having the most expensive home in a nation with the largest share of world’s poor. “Imagine the number of small houses that could have been built instead of an obnoxious display of wealth.”, some would say. In fact, this is a belief that I held less than two years back but as much as I agree that Antilla is a showcase of ostentatiousness, the conclusion that the wealth could have been used elsewhere outlines a mistaken assumption about human development.

Luxury Hate & Income Inequality

In India, poverty is conspicuous. Take a stroll anywhere and you can see people sleeping on pavement, labourers working in adverse conditions and children without a roof. It’s easy to see how a little amount of money could improve the lives of 194M people who go hungry every day. If someone buys a Lamborghini, a common reasoning that would follow would be how the ₹27M could have been used philanthropically. How “it could have fed thousands of people for years”.

Perhaps, the closer you are to poverty, the more unpleasant luxury feels with people around. Each expensive possession gives an impression of thousands of people that could have been helped by a little generosity. In a public survey, more than half of the British public said that the rich should donate at least 25% of their wealth for good causes. The math seems pretty apparent — if all the wealthy donated that much, it would rake up to billions of dollars and if that could reach the bottom quartile of the population, it’ll be enough to address a major chunk of world’s problems. But would it really?

Income inequality seems like an unfair arrangement. You have people who are spending millions gambling in casinos when there are poor who struggle for pennies every day. Thomas Piketty, a French economist and author of Capital in the Twenty-First Century, proposed a radical change to balance the income scale — a global progressive tax on “excessive wealth”. Piketty believes that there is a fundamental flaw in capitalism that encourages concentration of wealth in the hands of a few which necessitates a major change to address the problem.

It’s easy to fancy the idea of transferring a tiny fraction of colossal wealth to the poor but it breaks down when we consider that it’s nearly impossible to invent an efficient process to make that transfer. In an interesting thought experiment, American economist Arthur Okun dubbed these inefficiencies as “leaks” representing problems of real-world redistribution.

Consider the plausibility of a 2% tax on the wealthy and its subsequent transfer to help the impoverished. How much wealth would get lost in administrative processes? 30-40%? Hard to say, could be more. What figure would be acceptable? (Okun said that he would accept a leak of 60%). The problem would be worse for developing nations ridden with corruption where the “leak” might be high enough to make only marginal benefit reach the poor.

Foreign Aid Given To African Continent (in Billion Dollars)

Over the past 60 years, the African continent has received over a trillion dollars in economic aid and yet, more 50% of the population lives on less than a dollar a day. Why would it be any different if more wealth flew from the super-rich? Unless that wealth gets efficiently translated into economic development, the poor will always be back to square one.

The efficient use of money

$1B is a significant money — enough to build homes, hospitals and schools but it’s just a fraction of Indian economy — just .03% of the union budget. It’s understandable that those developments would be positive additions to the Indian economy but the help would be insignificant.

Let’s say $1B is enough to build 100,000 small homes for poor and could be given to them at a paltry price. By contrast, Dharavi, one of the largest slum in the world, homes a population of about 700K-1M. Even if we are able to solve the problem of lending the houses to the right people, the slums won’t disappear. An obvious consequence would be more people flocking to Mumbai or the slum-dwellers renting out their allocated homes.

We can see how housing for the poor isn’t the best solution in terms of long-term human development. Without the economic growth, there is more incentive to rent out rather than live in it which creates its own set of problems.

I am not trivialising the role of public expenditure but Governments are equipped far higher budgets and resources to carry out such programs on a national scale. Why they don’t work well enough is because of larger issues pertaining to the inefficient use of funds allocated towards them: a combination of corruption and bureaucratic red-tape.

Utilisation of Funds by Government and Private Charities

Certainly, private charities can prove to be more effective at using the money to benefit the public. Michael Tanner, Director of Health and Welfare Studies at the Cato Institute, testified before Congress that 70 cents of every Government entitlement dollar does not go to the poor people but to bureaucrats while in the case of private charities, it’s almost 82 cents going to the intended recipients.

But no matter how good charities are, their budgets would often be feeble compared to what Governments have and without economic growth even the public expenditure would be fruitless and the growth just ephemeral. The bigger deterrents to development have always been adverse Government institutions — civic services, political administration and police forces. If police forces are unhelpful in preventing theft and vandalism or protecting citizens, how will any business establish itself? How will the new jobs be created? If most of the taxation money is eaten away by abject corruption, how will it create infrastructure that benefits the public and businesses?

In the book, “Why Nations Fail”, the authors outlined how the difference between nations’ development lies in the effectiveness of their institutions —

“Inclusive economic institutions that enforce property rights, create a level playing field, and encourage investments in new technologies and skills are more conducive to economic growth than extractive economic institutions that are structured to extract resources from the many by the few.”

Effect of Foreign Aid On GDP in Pakistan

From 2001 to 2015, Pakistan received about $31B in foreign aid but if we compare the GDP growth in that time-frame, there is hardly any correlation between the aid and the corresponding growth. Whatever help the aid could have done was offset by political instability, inability to deal with militants, and lack of good institutions. An analysis by African economist Dambisa Moyo highlighted how foreign aid to Africa has made the matters worse for the continent. Instead of assisting development and making countries self-sufficient, the money has made them too much reliant on the “aid” drug.

The rich can’t help that much

I am not arguing that charitable institutions aren’t good for humanity. In most cases, they’ll be more effective than governments in achieving a goal. They can work for causes that would hardly be touched by any for-profit company but the fallacy lies when people start to think how endowments on a large scale could accelerate the pace of human development and how rich should do more to contribute, when in most scenarios, the help would be too marginal and localised to move HDI needle.

Without good institutions, the positive effects of charity are subsided by corruption, instability, red-tape and value-destruction (due to lack of law and order).

Surely, the donations can serve well but only if the institutions would.

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