Our Word is Our Weapon

In comments responding to my criticisms in this post, Paul of Global Growth Org asked me a series of questions, which I’ll try to answer here.

(i) Which statistic did I mis-represent?

Paul said these WTO statistics provided “clear evidence” that trade liberalisation is increasingly important for poverty reduction. They don’t.

(ii) What developing nation’s industry or service do you think should be protected from competition?
(iia) Who will this benefit?
(iib) How long will they benefit from protectionism?
(iic) Who will this harm?

My point is that these are not questions for me to try to answer, but for people in the countries concerned to answer.

(iii) What benefits do you see in trade-barriers to South-South trade?

Similar potential costs and benefits to the barriers to North-South trade.

(iv) If you accept that a primary cause of poverty is a lack of employable capital, how would you encourage FDI in to Sub-Saharan Africa?

Improve levels of health and education, and improve the access of producers in Africa to regional and global markets through more investment in transport, communications and power. Reduce structural disadvantages in world trade by removing barriers in rich country markets and eliminating harmful export subsidies. That kind of thing. I’d like to see the progress that has been made to improve democratic institutions and reduce corruption continued for its own sake, but I’m not convinced that this will increase investment significantly because I don’t think it’s the main constraint at the moment.

(v) How much extra capital inflows would Africa receive if it increased its engagement in world trade by 1%?

Gosh, I don’t know - have you got a figure in mind by any chance? Bear in mind that to answer that question you would have to be sure you were looking at extra capital flows that were caused by higher trade, as opposed to higher trade caused by extra capital flows or higher trade and capital flows caused by something else, e.g. improving institutions or better infrastructure.

(va) Do you think $70bn of private sector capital inflows would serve to alleviate poverty in Africa?

That depends. Private sector inflows should generally be good to some extent, but some investments are more pro-poor than others. And if capital inflows are merely feeding a speculative bubble that eventually bursts and hits the poor hard, then that’s no good at all.

(vi) Do you deny that open markets encourage increased trade?

They may well be correlated, but that could be because they’ve both been caused by something else, e.g. economic growth. This is quite plausible; as Dani Rodrik says, the consistent pattern is that countries reduce trade barriers as they grow, not before they grow.

And other factors are critically important too. As Dollar and Kraay say here (although in support of really terrible piece of analysis), “differences in countries’ trade shares reflect their geographic characteristics (for example, countries that are small and close to major markets tend to trade more than countries that are large or remote) to a much greater extent than their trade policy decisions”.

(vii) Do you deny that trade growth generally reduces poverty and brings prosperity?

The argument here seems to be that growth in trade volumes causes higher GDP growth which causes reductions in poverty. Well, it’s not clear that trade does ’cause’ growth in this way - rather, growth in trade volumes seems to be an outcome of other factors. Rodrik and Rigobon say here (pages 6 and 7) that trade ‘openness’ (trade as a % of GDP) doesn’t seem to be good for GDP once you control for geography and institutions, but GDP growth is good for trade growth - another example of how an apparent correlation may not reflect the causation you think it does.

Low income countries are actually more ‘open’ in trade terms (again, ‘openness’ referring to %trade/GDP) than rich countries, but the idea that “the richest countries are those who trade the most” is still remarkably popular, as this recent post from the consistently wrong Globalization Institute shows.

(viii) Are you opposed to increasing world trade and promoting economic growth in principle?

No. I’m mostly interested in reducing poverty, and growth can be a means to that end.

(ix) How do you think a sovereign nation is forced to liberalise exactly?

Conditionality, as the World Bank itself has admitted. The IMF in particular has long exploited its position as lender of last resort to impose liberalisation conditions on countries which had no other choice but to accept.

(x) Have you noted that most of us free traders advocate the advanced nations of the world unilaterally adopting free trade? That we don’t care much for managed trade as offered by the WTO et al, but we take what we can in terms of market opening where we can?

Your point being?

—

Overall I would argue against seeing the issues in these extremely general, aggregate terms: even if it were true that trade liberalisation generally caused higher trade volumes (and it’s not clear that it does) and that higher trade volumes generally cause higher growth (and it’s not clear that they do) and that growth was always pro-poor (if it increases inequality, it’s quite possible for it to be anti-poor), then it would not necessarily follow that, say, Mozambique should have removed barriers to the trade in raw cashew nuts. Each situation would be different, and each decision on trade policy should be taken on its own merits.

Secondly, it is extremely important to not confuse correlation with causation. If growth in trade volumes is correlated with growth in GDP, it’s all to easy to simply assume that the GDP growth was caused by by the increase in trade. But there’s two equally plausible explanations - the GDP growth caused the trade growth, or both were caused by something else.

As Owen Barder rightly points out, it is stupid of Christian Aid to talk of “the slavery of free trade”, but hyperbole aside the Trade Justice Movement’s platform is mostly pretty reasonable. The same can’t be said for the Globalization Institute’s “Trade Justice or Free Trade“, a general attack on the entire Trade Justice agenda that mixes factual error, economic illiteracy and plain old smear tactics.

I could spend quite a lot of time listing the various cliches and unintentional ironies (e.g., the Common Agricultural Policy is described as ‘Fair Trade’, but nasty leftist NGOs are “unfairly demonizing” free trade) in the report, but I’ll leave you to discover them for yourself. Instead, I’d like to focus on author Alex Singleton’s analysis of the historical record, or rather the lack of it.

If free trade is unambiguously the best policy a poor country could have, as Alex suggests it is, you’d think thered’d be no end of examples of countries free-trading their way to prosperity. But there isn’t, for the good reason that with maybe two exceptions every poor country that succesfully joined the rich club embarked on their early years of high growth behind substantial trade barriers. The solitary example Alex can produce is, er, Hong Kong, a tiny trading-post with no agricultural sector which barely counts as a country in the first place (and the same goes for Singapore, the only other credible example of a free trade success).

However, we have plenty of examples of countries that protected their industries while posting very fast growth. There’s pretty much every Western country, for example, and as Dani Rodrik points out (page 18 here), the Asian ‘tigers’ too. Trade policy was obviously not the only factor in their success, but it’s equally clear that those who liberalised carefully have generally done better than those who heed the advice of ideologues and rush it (p. 132 in this Oxfam report). Indeed, Rodrik sums up the evidence as suggesting that “the only systematic relationship is that countries dismantle trade restrictions as they get richer”.

The Globalization Institute report reaches its nadir when Alex attempts to answer the question “Why is Africa poor?” without referring even once to the debt crisis or to the collapse in commodity prices and Africa’s terms of trade or to capital flight or to the oligopolistic market concentration that keeps the prices paid to farmers for key goods like coffee down, or to the geographical and historical legacy which has left Africa with higher transport costs than any other region of the world. Nor is he aware of the evidence showing that aid is good for growth, good for investment and bad for capital flight. He does trot out the idiotic observation that Africa has received lots of aid “yet is still poor” (thank you, Bill Easterly), but nominates as his African poster-boy Botswana, a country which the World Bank cites as an aid success story and in which (as Steve Radelet points out here - p. 18) “aid flows averaged 14% of GNP during the late 1970s, and averaged $110 per person in the 1980s”. Then he has the cheek to accuse ‘anti-free traders’ of “unwittingly masking the real problems and helping to perpetuate poverty and misery”.

To illustrate just how hypocritical this is, let’s see how protectionist Sub-Saharan Africa is in comparison to wealthier regions. If Alex’s “free trade is better” argument is right, wouldn’t Africa’s poverty be at least in part a reflection of its high trade barriers? But it turns out that Sub-Saharan Africa is actually less protectionist than other developing regions, as this World Bank table (from the 2004 Global Monitoring report, p. 77) comparing the ‘Overall Trade Restrictiveness Index’ of each region shows (a higher percentage OTRI denotes a higher level of trade protection):

I’m not saying that protectionism is the way forward for poor countries, and I don’t think the Trade Justice Movement is either. They (and I) want poor countries to have the freedom to choose (surely Milton Friedman would approve?) their own policies, just like today’s rich countries did in their own past and without having trade liberalisation rammed down their throats as part of a loan deal or in ‘reciprocity’ for reform of grotesquely harmful policies such as the CAP in Europe or cotton subsidies in the US. We need a constructive discussion on trade and development (and the TJM needs to rein in its hyperbole), but the Globalization Institute’s uninformed and nakedly ideological report adds nothing of worth to the debate.

So, the World Trade Organisation sends out a press release about how its new volume of statistics shows “Developing countries’ goods trade share surg[ing] to 50-year peak”. It includes a quote from WTO Director-General Supachai Panitchpakdi, who says

“As trade continues to play a growing role in economic activity, it is increasingly important for development and poverty alleviation …”

Now observe how this quote gets the Global Growth Org treatment:

The data provides clear evidence that trade liberalisation continues to play a growing role in economic activity and is increasingly important for development and poverty alleviation.

Did you see it? No, I’m not talking about the way that Supachai’s words are ‘de-quoted’ so they look like original comment - we’re used to that kind of thing from GGO. What really struck me was how GGO obviously thought the quote wasn’t gung-ho enough about free-trade as it was, so they just improved it by making it look like the “data” provided “clear evidence” that “trade liberalisation” is “increasingly important for development and poverty alleviation”, when of course the original quote is talking about trade (the outcome), not trade liberalisation (the policy). To put it another way, they just doctored the quote to support their position.

Not content with discrediting only his own work, GGO head (and sole member, as far as can be made out) Paul Staines now seems to have taken the shilling of that other one-man Non-Governmental ‘Organisation’, the Globalization Institute, and he merrily re-hashes over at their site too (and again somehow fails to put quotation marks around the paragraphs lifted straight from the WTO press release). Gosh, with Paul and Tim Worstall on the case, the Globalization Institute really is shaping up as a fearsomely intellectual powerhouse of development economics …

Chris at Stumbling and Mumbling says that “the official poverty line – 60 per cent of median income – is no measure of poverty, or even of changes in it”, because we can easily envisage situations in which “The numbers in poverty can decrease as the poor get poorer, or increase as they get richer”. What matters to him is “whether people are the victims of injustice or of misfortune which they were unable to insure against. It’s how inequalities arise that matter, not how great they are”.

Well, being born into relative poverty certainly strikes me as impossible to insure against. Is it a misfortune? I would say yes, because people in relative poverty tend to lack the advantages of those on average or above-average incomes, such as being able to effectively buy access to the better ‘free’ schools by buying a house in the area. This is just one aspect of the geographical sorting which tends to ensure that people born into low incomes are also born into areas of high crime and low opportunity, and I’d argue that these differences are greater in societies with higher relative poverty. To put it another way, the main process through which inequalities ‘arise’ is that children keep getting born into relative poverty. The best way to end uninsurable injustice, then, short of mass sterilisation, seems to be to end relative poverty.

Lastly, as I’ve said in reply to comments on this post, I don’t see why relative poverty is not a valid concern just because absolute poverty or average incomes are too. In a situation where poverty falls while the poorest get poorer, you’d better believe the discrepancy will be highlighted - in fact, this is exactly what happened last week, even though it’s not clear that the incomes of the poorest actually have fallen. Relative poverty is one way of looking at people’s incomes out of many, and while I agree that a fixation on it to the exclusion of everything else is misguided, I don’t think that’s what we’ve got.

Scott Campbell and Tim Worstall are agreed: defining poverty in relative terms is nothing but a trick pulled on an unsuspecting public by nefarious ‘Leftists’. Campbell approvingly cites the journalists Jamie Whyte (Times) and James Bartholomew (Torygraph). Whyte confidently asserts that “THERE IS NO POVERTY in Britain”, while Bartholomew settles for the milder “there is less of it than there used to be”, but both argue that politicians (or anyone else, presumably) who use the concept of relative poverty are dishonest because, as Whyte puts it “they do not mean by “poverty” what most people do”.

Really? I’d like to see them prove it. Personally, I think they haven’t got a clue what ‘most people’ think and don’t actually give a toss one way or another. Here’s a few facts on British people’s attitudes to poverty:
-A majority believe there is ‘quite a lot’ of poverty in Britain, and have done ever since at least the mid-1980s. At the latest count 62% held this view.
-The proportion of people who thought there was ‘quite a lot’ of poverty in Britain grew steadily until 1994, even as levels of absolute poverty (measured here as 60% of 1998/99 median income) were static or falling.
-In 2000, only a fifth of people thought ‘poverty’ had fallen over the previous ten years, when in fact absolute poverty levels (using the same measure as above) had approximately halved over that time.

These figures are based on John Hills’ analysis of the British Social Attitudes survey. Hills sums up:

This suggests that most people do not have an absolute poverty line in mind. If they had, they would have been reporting constant poverty in the 1980s and falling poverty in the 1990s. Rather, they do seem to have in mind a poverty line which rises in real terms in some way over time. There is also a feeling that poverty increased less rapidly in the 1990s than it had from the mid-1980s.

Hills also notes that 80% believe the gap between rich and poor is ‘too large’.

All this may come as a surprise to Whyte and Bartholomew, who seem to assume that they know the minds of the British people beter than the British people themselves. Maybe we shouldn’t expect too much, though: I notice that Bartholomew’s latest effort for the Express opens with a glaring error we should all be familiar with now, namely

The Institute of Fiscal Studies has now established that average incomes fell in 2003/04 …

Oh dear. As Bartholomew writes elsewhere on his blog, “You can’t believe a word they say”.

In Sunday’s The Business, Fraser Nelson and Allister Heath delivered the news that “Britain’s poorest 10% of households are becoming even poorer” under Gordon Brown’s chancellorship. This is “according to figures discovered by The Business buried in a 357-page Department of Work & Pensions (DWP) study slipped out last week” (they’re referring to the supplementary tables to the DWP report Households Below Average Income).

So, is there any truth to the claim? Not very much, and really not enough, because the survey results aren’t robust enough to support it. If you open these spreadsheets and go to table A2, you’ll see that the weekly real income after housing costs of the poorest 10% apparently fell from £90 in 2002/03 to £88 in 2003/04. Case closed? Well, no. Looking at Table A1 we see that estimates of changes in the incomes of the poorest 10% are ‘particularly uncertain’, probably mostly due to small sample sizes - the best guess is that their incomes grew by 11% between 1996/97 and 2003/04, but we can be no more than 95% sure that they grew more than 7% and less than 20%. Basically this means that a drop of £2 in a single year is within the margin of error, i.e. not significant.

What to do? A typical response to this kind of uncertainty due to small samples is to average out responses over a few years, hopefully removing the statistical noise and revealing a steadier trend. If we do this to the incomes figures provided, it becomes very hard to sustain the claim that “the poor are getting poorer” under Labour. As the chart below shows, the real incomes of the poorest 10% seem to have increased about 13% before housing costs and 22% after housing costs over about a decade, with as much if not more of the increase since Labour took power.

How does this income growth compare to that of people higher up the scale? Not very well, actually; it’s fair to say that if the incomes of the poorest 10% have not dropped, they have risen slower than those of everyone else, as the next chart shows.

What’s going on here? The Business asks the Insitute for Fiscal Studies:

Andrew Shephard, an analyst at the IFS and joint author of its Poverty and Inequality in Britain report released last week, said the poorest 10% of the population are getting poorer because they tend to be childless - and have no scheme to help them.

“If you look at the policies of this government, they are about helping parents and pensioners,” Shephard told The Business. “The groups most favoured by these policies tend to be in the second-lowest income category,” he said.

Incidentally, Madsen Pirie of the Adam Smith Institute predictably leaps on the story’s dodgy stats and, tongue only partly in cheek, declares that the apparently declining situation of the poor is due to a ‘Socialist’ government. So how did the poorest 10% do under, say, Thatcher? Much worse, of course, as the below chart from the IFS’s recent commentary on the HBAI stats illustrates (the bars represent income growth under Blair and the line income growth under Thatcher, and the poorest decile is again on the left).

[Update: this post probably needs a summary. Here it is:
-There’s not much evidence that aid ‘crowds out’ private sector actors, but there is some evidence that it ‘crowds in’ private sector investment.
-The fundamental issue is that poor countries and poor people don’t have enough resources to pay for goods and services they desperately need, which is the main reason why the private sector is not currently providing them. Aid is a good way of resolving this problem.
-Charging tolls on any new or improved roads in Mali or some other incredibly poor place would be a really stupid idea.]

What with one thing and another I haven’t been able until now to continue the argument with Tim Worstall about aid effectiveness. To sum up the story so far, Tim said there was “as yet little evidence that official aid actually helps”, Owen Barder pointed out that a recent paper from the Center for Global Development represented very strong evidence that aid was good for growth (and has since listed off a series of other examples of aid effectiveness), Tim responded with a series of questions and/or criticisms of the CGD paper, and I tried to answer them.

In his latest contribution (a couple of weeks back now), Tim seems to have mostly given up arguing against the results of the CGD paper and instead goes off in several different directions at once. The most important argument he makes, I think, is that aid-funded spending creates the same problems as long-term deficit-financed spending, because of ‘crowding out’ effects. Owen had previously pointed out that the ‘crowding out’ concept was precisely why aid was a better source of funds for government spending in poor countries than deficits or tax - because aid means the government doesn’t have to raise taxes, borrow or print money to fund necessary expenditure. According to Tim,

That’s a very shallow reading of crowding out effects, indeed I would argue that that’s not the correct nomenclature at all. I more normally use that phrase to mean when the government doing something leaves no room for private sector actors to do that thing

Well, sorry, but it is the correct nomenclature, or at least that’s one kind of crowding out. As Wikipedia says, there are really two types:

In economics, crowding out occurs when the government is borrowing heavily while businesses and individuals also would like to borrow. The government can always pay the market interest rate, but the private sector cannot, and is therefore crowded out. The state is in other words borrowing so much that interest rates increase, which in effect squeezes the private sector out of the credit markets. Crowding out can also come from state spending on areas that might be provided more efficiently by the private sector, such as health care, or even through charity and redistribution.

So Owen was perfectly correct to point out that aid does not cause crowding out on the first score. This is an very important point - and after all, if you’re against high tax rates, inflation and government borrowing, shouldn’t you be for something that helps keep them down?

It’s the second kind of ‘crowding out’ that Tim says he’s concerned with - “when the government doing something leaves no room for private sector actors to do that”. Is this a problem in the kind of very poor countries which are most reliant on aid? I would say no, for several reasons:

1. Much of the expenditure that aid funds is important for development but will provide low or no monetary returns for the forseeable future so are not attractive to private firms. This is partly because of the nature of the goods and services involved - free universal primary education, for example, or better roads in poor rural areas - but also because the people (and the governments) that need this kind of spending most tend by definition to be the poorest. There’s a severe mismatch between needs and ability to pay - put another way, there may not be much a very lucrative market for insecticide-treated nets to combat malaria in West Africa, but there sure as hell is a lot of need for them.

2. When aid-financed expenditure was reduced in Africa, the private sector, suddenly no longer ‘crowded out’, did not rush in to take its place. The recent Commission for Africa report (Chapter 7, page 225-6) describes what happened:

Despite its clear benefits, African governments and development partners sharply reduced, over the 1990s, the share of resources allocated to infrastructure - reflecting its lower priority in policy discussions. In retrospect, this was a serious policy mistake, driven by the international community, that undermined growth prospects and generated a substantial backlog of investment – a backlog that will take strong action, over an extended period, to overcome.

This was a policy mistake founded in a new dogma of the 1980s and 1990s asserting that infrastructure would now be financed by the private sector. Throughout the developing world, and particularly in Africa, the private sector is unlikely to finance more than a quarter of the major infrastructure investment needs. Between 1990 and 2002, relative to total infrastructure investment in the order of US$150 billion, private commitments for infrastructure in sub-Saharan Africa totalled only US$27.8 billion, and two-thirds of this amount (US$18.5 billion) was for telecommunications.

3. Thirdly, the empirical evidence suggests that aid is more likely to ‘crowd-in’ rather than ‘crowd-out’ private sector investment. Collier and Dollar say that “for the typical developing country, an additional 1% of GDP in aid results in an estimated additional 0.9 percentage points of GDP in gross investment” (that’s all investment, but some of it will be private sector as not all aid-funded public expenditure is on ‘investment’, if you follwo). Also, Collier and others elsewhere note that “aid substantially reduces capital flight … We tentatively suggest that taking a long view each dollar of aid might be scaled up by around twenty to forty cents of induced domestic investment that would otherwise have left the country as capital flight”.

These findings are consistent with the CGD paper which showed that short-impact aid was good for growth, because it would be very odd if aid was good for growth and bad for private investment at the same time.

Like I said, Tim goes off in several different directions at once in his post, so I’ll try to address some of them here. Firstly, he disagrees with the statement that the private sector has been pretty bad at providing public goods because, hey, what about lighthouses and lifeboats in the UK? Well, for one thing I didn’t say that in every case public funding and public provision was better, but Tim does seem to be taking the opposite dogmatic stance here: “So, public goods can be provided perfectly well by private actors”. As johnb says in comments, this is like saying “Will Smith has become extremely rich, therefore African-Americans face no barriers towards becoming wealthy”. Also, the idea that the lifeboat service gets so many donations because it is one of the few services that is funded that way, for example, obviously hasn’t occurred to Tim. Nor has the idea that funding a national health or education service by donation or charges might not be the best solution for a poor country. If this argument had any validity then private donations would be fully funding schools and hospitals all over Africa and other Third World countries. They’re not, so it doesn’t.

Public goods can be provided (and, most important, funded) by private actors if a host of other conditions are fulfilled, but they rarely are. That’s why lifeboats in the UK are the exception to the rule, even in a rich country.

Tim says

Jim thinks that education, health and infrastructure are public goods, which by his take on the world should be provided by the public authorities.

I think Tim misunderstands. It’s not like I’m demanding that these things be only financed by public spending and that we should shove all those private firms willing to provide these services aside. It is because private firms, particularly in poor countries, are not interested in providing these services or because these are not immediately profitable areas (or both) that these essentials have to be publicly provided.

After all, the state provided schools in the UK are so much better than the privately provided ones, the NHS is so good that no one ever wants to go private …

Sorry, but what has any of this got to do with building roads and eradicating malaria in Africa? And has it really not occurred to Tim that private schools are ‘better’ because they are in the minority and can charge so much and select their pupils? What does he imagine would happen if every family had to pay the full cost of their childrens’ education? Some children wouldn’t get one, that’s what would happen. And that’s exactly what happens all over the Third World. There are vast areas of the world where the state does not provide education. By Tim’s logic, these places should be over-run with private companies providing top-notch schooling for grateful children. Surprise surprise, nothing of the sort is happening. Tim sums up by saying “You want more roads? Tolls”. Yeah, try that in Mali and see how far you get. Here’s a thought - why don’t we who have more money than we know what to do with spend a little bit of it so that people in Mali who are barely getting by as it is can have roads without having to cough up for tolls, so that they can get their goods to markets and actually trade their way out of poverty like Tim keeps saying they should? No, that’s obviously just crazy.

Lastly, Tim mentions a paper which apparently shows that mobile phones are good for growth in poor countries, and seems to think this means that we just have to increase the number of mobeys in Africa and all will be fine. I will do a post on this soon, but I’ve yet to finish reading the paper. I do have some concerns that it’s showing more the effect of growth on mobile phones than vice versa though. Also, the growth in mobile phone penetration has for several years actually been much higher in African and LDC countries than elsehwere, yet their growth is still poor, so I’m a little sceptical that this is the magic bullet that Tim seems to think it is. Tim of course can’t help being a bit idiotic about this:

Now, people who were serious about beating poverty in the Third World would be trumpeting this fact, look, look, a simple supply side change, just sell a few more licences for mobile phones, that’ll help, well, they would wouldn’t they? They’d be pointing to how simple it is, just get phone usage up to 10% of the population and it’ll be just as good for growth as all that money that we get to advise you how to spend!

Says it all, really. I think I’ll file this one under ‘Anything But Aid’.

Tim Worstall came out with a classic one-liner on development yesterday, criticising UN development agencies on the grounds that

it is precisely the neo-liberal agenda that has been shown to be correct

Hilarious! I suppose Tim could use as supporting evidence the free trade miracle that is Sweden and Latin America’s hopeless growth performance under import substitution. Never mind the fact that neither of these claims actually bears any relation to reality - that hasn’t stopped Tim before and it won’t stop him now.

Still, I’m a bit of a stickler for this kind of thing, and I would like to see Tim produce some actual evidence which shows that the neo-liberal agenda is so ‘correct’ (in his post, he mysteriously declines to offer any). Because the rather dismal performance of poor countries under the same neo-liberal agenda as imposed by the World Bank and IMF rather suggests otherwise, as does the fact that the WB/IMF have in recent years seemed to back away from this agenda and towards the general approach more likely to have been advocated by the UN agencies.

First, for the benefit of Pat, who strangely enough rang me yesterday evening while I was writing my last post demanding to know what the mean, median and modal incomes in Britain were, here’s a chart (from the same IFS report) showing the same (I’ve added in the mode):

As you can see, there’s quite a long tail there, representing quite a lot of very rich people. But in reality, the tail is even longer: according to the IFS, “1.4 million individuals (out of a private household population of approximately 57 million individuals) have incomes above �1,100 a week and are not shown on this graph”. That’s the equivalent of another bar around the height of the cluster showing incomes between �200 and �300. I’d love to see a chart that showed the entire tail sometime.

Secondly, the Treasury have described the IFS analysis as “complete rubbish”. That’s pretty disgraceful, considering (as Dead Men Left points out) that they happily cite IFS figures from this and other reports when it suits them.

Thirdly, British Spin, a blog that’s new to me at least, has been going to town on this subject and is well worth a read.

And that’s all for now.

So, if you live in the UK, did you get poorer last year? Probably not. But wait, didn’t the Times, the Telegraph, the Tories, the Adam Smith Institute, all say that average incomes went down? Yes, they did. But they’re liars and/or idiots. Here’s why.

According to the Institute for Fiscal Studies, the average individual income only fell (by 0.2%) if you take the mean as your average. Since the mean income is biased upwards by the many very high incomes in this very unequal land of ours, it will also be disproportionately affected by any changes to the incomes of the rich. If you want to know what happened to the ‘average’ individual, you take the median. What happened to median income between 2002/03 and 2003/04? It rose by 0.5%; not by much, but it rose.

If you break down the population into income quintiles with the poorest 20% on the left and the richest on the right, this is what happened to their incomes in the last year:

So broadly speaking the only ones to lose out were the rich, as Gordon’s tax rise bit off a little chunk of their incomes and tax credits gave a little more to the poor. No wonder the Tories and the ASI are pissed off!

Here’s the same breakdown comparing the Blair years with Major’s and Thatcher’s reigns of terror:

So overall, while New Labour’s record on poverty is not wonderful (see the IFS report for much more detail on how and why), it’s certainly a lot better than that of the Tories.

By the way, it’s possible that average incomes actually rose by more than the IFS figures show. They seem to be heavily influenced by a huge fall in reported incomes of self-employed people - excluding the self-employed, the median income rose by 1.3%, lower than previous years but still much better than nothing. Over at Shot By Both Sides, John B speculates that this is due to “a rise in the black economy rather than a fall in income” as more self-employed people declared less of their income in reaction to tax rises. Maybe, maybe not - it’s still a big drop in incomes, and if that was all down to the modest tax rises in the 2002 Budget Labour should be worried. There well may be other problems in measuring self-employed incomes using this kind of survey.

Anyway, these are just methodological concerns. Bottom line is, you probably didn’t get poorer last year. Unless, that is, my average (er, median) reader is a top-bracket earner, which is possible I suppose, though I rather doubt it.

For further reading, Meaders at Dead Man Left has a nice post on all this.