Thursday, March 14, 2013

Reporting Income and Wealth Inequality: The Right Way or the Highway

I completely agree that income and wealth inequality are serious problems that need to be addressed, or at the very least, discussed. So I wholeheartedly support efforts to make the public more aware of the problem, such as this recent article by Interaksyon. What I don't like is using facts or statistics inappropriately to get one's point across or push a particular agenda.

Case in point.

The article refers to a presentation by former economic chief Cielito Habito which shows that:

In 2011 the 40 richest families on the Forbes wealth list accounted for 76 percent of the country's gross domestic product (GDP) growth. This was the highest in Asia, compared with Thailand where the top 40 accounted for 33.7 percent of wealth growth, 5.6 percent for Malaysia, and just 2.8 percent for Japan.

While I won't go so far as to say that Prof. Habito was wrong (I have the utmost respect for him), I do have questions, and maybe some reservations. How did he arrive at 76%? It is important to ask this question because the statement implies that the rest of the country--the 100 or so million minus the members of the Forbes' Top 40--"account for" 24% of the country's GDP growth.

Going by how the statement was worded, it seems that 76% comes from getting the total wealth of the 40 richest families in the Philippines (based on the 2011 Forbes list) and dividing the sum by the change in GDP in 2011, or some similar wealth-to-income comparison (you can try using the Forbes data and this chart from Google for a ballpark replication). If you think about this method for a moment, you'll realize that it's not appropriate because the total wealth of all people in the Philippines is not equal to the change in GDP, or even to the total GDP in one period. Wealth is not the same as income (one can interpret GDP as the income of a country in a particular period); income is what one earns every period and wealth is essentially accumulated income.

The article further compounds the issue by saying:

According to the Forbes 2012 annual rich list, the two wealthiest people in the Philippines, ethnic Chinese magnates Henry Sy and Lucio Tan, were worth a combined $13.6 billion. This equated to six percent of the entire Philippine economy.

I take it by "Philippine economy," the author meant "GDP." Here, the wealth-to-income comparison--and thus the misuse of data--is clearer. Google quotes the Philippines' GDP in 2011 to be $ 224.75 billion, so 13.6/224.75 = 6%, which is exactly what the author cites as proof for her thesis. But again, the comparison does not make sense! It does not mean that the wealth of the rest of the Philippine population sans Henry Sy and Lucio Tan is 94%!

My point is that if you want to highlight wealth inequality, then do it correctly: compare the wealth of individuals or a group of individuals to the total wealth in the country. You want to discuss income inequality, then compare income to income.

Income and wealth inequality are real problems not just in the Philippines, but in many parts of the world as well. If you want to use statistics to raise awareness about the issues, you owe it to your readers to do it the right way.

Here's one way of doing it.

Or using data from all around the Internet:

Total wealth in the world: $ 200 trillion
The Philippines' share of world wealth: 0.67%
Implied total wealth of the Philippines: $ 1,340 billion
Net worth of Philippines' Forbes' 40 richest: $ 47.43 billion
Percentage of Philippine wealth owned by Forbes' 40 richest: 3.5%

Not as exaggerated as the numbers used in the article, but still fully supports the case for wealth inequality. And this time, 3.5% means something.

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