On Oxfam's wealth inequality index

Oxfam's recent inequality report said that top 9 wealthiest in India own wealth equal to that of the bottom 50%. Note that it is not top 9%, it is top 9 individuals. Before proceeding further, it is important to distinguish wealth and income. Wealth is stock while income is flow. Income is what you get on a regular basis. If one saves or buys assets using that income, income turns into wealth.

The report has received several criticisms. In this specific example, Prof Ila Patnaik criticizes the report on two counts.

1. Since wealth is net of assets and liabilities, if one borrows a loan, their wealth decreases, that's reflected in wealth statistics. The loans increase their future income and hence is not necessarily bad, as the wealth statistics would make us believe.  Given that India pushed MUDRA recently, it is bound to decrease the wealth of the poor.

2. As the poor gain income, they do not use the additional income to save or convert it into assets. They instead increase their consumption. So, wealth statistics do not reflect the increasing incomes of people and the number who are out of poverty.

I do not find these two criticisms appealing, for the following reasons.

1. It is true that borrowing loans is good for the future, which is reflected negatively in wealth statistics. But, one must note that borrowing is not a new phenomenon. If it were to benefit in the future and result in accruing wealth, borrowing in the past would have reflected in the wealth statistics now. But, the Oxfam reports have consistently shown the same trend of wealth inequality. This puts the optimism of wealth accruing ability of loans in question.

2. The second criticism of wealth not capturing increasing incomes is unfair. The report says it measures wealth and does that. It doesn't measure income. Blaming a wealth index for not capturing income is akin to blaming a weighing machine for not capturing height. The interpretation of the index is the issue here and not the index itself.

Any index that tries to capture inequalities will have shortcomings. Moving beyond the technicalities, one must focus on the larger picture, which is the growing inequality in India.  Indices are only a constant reminder of this problem. The limitations of the inequality indices should not be used as a reason to brush aside the problem. 

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