Rising poverty drives bne’s global Despair Index

Rising poverty drives bne’s global Despair Index
Poverty is inflating the Despair Index in developed nations.
By Ben Aris in Berlin November 15, 2016

bne IntelliNews’ Despair Index values are contained in most developed countries of the world and many of the former Eastern Bloc countries have scores on a par with their Western peers. But the share of poverty remains too high in many countries in both the east and west, pushing their Despair Index readings to painful levels that could fuel more social unrest.

The bne Despair Index was launched in 2011 and is a shorthand way to assess what life is like for people in the bottom third of society by adding together the national statistics that affect this group the most: poverty, unemployment and inflation.

The base line for the index should be a value of about 6: no poverty, 5% residual unemployment and 1% residual inflation. The lowest poverty level recorded by any country in the last 20 years was France's 6.1% in 2001. However, since then scores of around 25 have been common for most developed countries.

Currently, the Despair Index for the leading Organisation for Economic Co-operation and Development (OECD) countries ranges from the top-ranked Iceland with 9.6 followed by Denmark (9.9), Switzerland (11.6) and the Czech Republic (11.8), which is the highest ranked country from the former Eastern Bloc, down to the bottom of the list of Turkey (35), Spain (35.5) and Greece (38).

Outside the OECD members, Russia performs toward the bottom of the list with a score of 26.2, though has improved to come back below the 30 level where the index was for most of last year, thanks to historically low unemployment and falling inflation.

Ukraine does even worse with a score around 50, but that is based on a poverty level last formally measured in 2013 before the economic crisis and the Euromaidan protests sent the economy into a tailspin. Some unofficial estimates put the Ukrainian poverty line as high as 80% due to the collapse of incomes following the devaluation of the hryvnia. The National Bank of Ukraine (NBU) set the minimum wage at UAH3,750, which given the average wage in Ukraine is currently UAH1,176 ($50) a month that means “the majority of Ukrainians are beyond the threshold of absolute poverty”, according to Rada deputy Andrei Shipko. Taking 80% as the poverty line would put Ukraine’s Despair Index at a massive 101, which would be in keeping with Russia’s experience when it went through its economic collapse in 1998 and its Despair Index was in the high 90s.

Even with a conservative estimate of 30 for the poverty line, and factoring in the falling inflation (which is expected to end the year at 12%, a vast improvement from the 43.3% it ended 2015) and falling unemployment rate of 9.3%, Ukraine still has a terrible Despair Index score of 51.7.

Youth problems

In the rest of the world, the situation is not so bad, though the main bugbear is the persistently high levels of poverty in many developed countries. Surprisingly, Iceland tops the list of OECD countries in terms of the lowest level of poverty for the first half of this year.

In its report “Society at a Glance 2016, OECD Social Indicators”, the OECD found that the average poverty level was 11.4%, but youth in the OECD universe faced an average of 14%. All the countries in the top half of the list have poverty readings under 10%. All the countries in the bottom half of the list have poverty levels of at least 13%, including the US with a poverty rate of 17%.

The US Despair Index score is actually a very poor 23.9 given its size and aggregate prosperity, due to a persistent problem with poverty. While inflation and unemployment are low (1.5% and 4.9% respectively) the existence of a massive number of “working poor” have kept its poverty levels at nearly double the Western European average, inflating its Despair Index score. Presumably, it is the pain this group is suffering in the bottom third of society that President-elect Donald Trump successfully tapped into to win the US elections. Out of the developed nations, the US ranks near bottom in 26th place out of 34 countries in terms of its Despair Index score.

Outside of poverty, few countries have a problem with the other factors; indeed, many countries in the West are suffering from mild deflation. The three counties in the ranking with a real problem with inflation are Russia, Turkey and Ukraine, which have inflated those countries’ Despair Index scores. The Central Bank of Russia (CBR) is in the middle of a campaign to bring inflation down to 4% by the end of 2017 and if it succeeds, then Russia’s score will fall to 23.8, putting Russia just ahead of the US again.

Unemployment is also not a problem for many countries in the top of the list, but in the bottom two-thirds the performance is mixed. Slovenia’s 10.7% unemployment rate is uncomfortably high for an EU country but relatively low by regional standards. The only other countries with more than 10% unemployment are Turkey (10.7%), Spain (18.9%) and Greece (23.4%).

On this factor the real problems are not in CEE at all, but in the heart of Europe. Spain and Greece have high aggregate unemployment, but if the youth unemployment rates of 42.6% and 42.7% respectively as of September are used in the index’s calculation, then Spain would have a Despair Index score of 59.2 and Greece 57.3 – both double Russia’s and more than even Ukraine’s. 

Any score over 30 represents a level of pain that fuels social unrest and these high scores may in part explain the rising tide of populism in Europe and the US, as young people in particular become increasingly desperate and frustrated with their situation.