Income Inequality, Wealth, and Illicit Financial Flows in Asia

August 1st, 2013

In recent years wealth among the wealthiest has increased. This trend is well-documented in the United States, where commentators have noted that since 1979, the rich have become richer and the poor have become (relative to the rich) poorer. Dubbed the “Great Divergence” by NY Times op-ed columnist Paul Krugman, this phenomenon may be both a driver and the result of tax policy and tax evasion in the United States. But America isn’t the only country vulnerable to these kinds of trends. In fact, evidence from recent years has suggested that these trends are at play in several emerging markets, particularly those in Asia, where incomes are rising with steady economic growth.

Wealth among the wealthiest residents of Asia has increased in recent years. In particular, as the effects of the Great Recession ebbed, the economic recovery came much faster to high net worth individuals in Asia. In recent years, more people in Asia have become millionaires. For example, according to RBC Wealth Management and Capgemini, in 2011, the number of people in Asia-Pacific with assets between $1 and $5 million rose from 1.9 to 3.08 percent, while their total wealth increased 1.5 percent. In fact, in recent years, the countries with the largest increases in populations of ultra high net worth individuals have been emerging markets, including India and China.

There are now 18,000 centa-millionaires, that is, those who have more than $100 million in assets, in Southeast Asia, China and Japan. This is more than both the number of centa-millionaires in North America (17,000) and Western Europe (14,000).

We can attribute much of these trends to economic growth and robust export markets among these countries. Strong GDP growth on its own does not guarantee a nation will see a rise in its wealthiest citizens. But rapid GDP growth does create opportunities for large-scale wealth creation, and able individuals in Asia are capitalizing on those opportunities.

Many of these trends are positive. They reflect the economic opportunities associated with growth, which in emerging markets has not only created wealth among the nations’ elite, but has also contributed to rising standards of living and stronger middle classes. We should not ignore these overall positive dynamics. But cautiously. Increasing concentrations of wealth among the wealthiest can also contribute to tax evasion, illicit financial flows, and income inequality.

International banks, particularly our usual suspects, have clearly taken keen note of the rising number and proportion of high net worth and ultra high net worth individuals in emerging markets and Asia. For example, UBS, Switzerland’s largest bank, is targeting affluent clients in emerging markets, particularly China. UBS Chief Executive Officer Sergio Ermotti recently boasted that his bank has a “penetration of one in two billionaires in the world,” but greater market saturation in Asia, where UBS has a relationship with as many as eight in ten billionaires.

With illicit financial flows already averaging an annual US$2.74 billion—the highest in the world—China can hardly afford this relationship.

The interaction between illicit financial flows and income inequality isn’t simple, nor has it been proven empirically on a large-scale. The theory goes, however, that they drive each other. Rising income inequality creates more individuals with the resources and opportunities to send funds abroad. Meanwhile illicit financial flows (and tax evasion in particular) both reduce government revenues—and therefore their ability to provide social services and alleviate poverty—and contribute to increasing concentrations of wealth among those wealthy tax evaders.

High income inequality can undermine social cohesion, create barriers to social and economic mobility, and result in increased corruption and cronyism. Meanwhile, illicit financial flows erode governance, constrain domestic investment and economic activity, and reduce governments’ ability to provide social services, such as healthcare and education. Both are indicative, but also side effects, of economic growth. Developing countries, but particularly emerging markets in Asia and with rising proportions of wealthy individuals, should take note.

Written by Ann Hollingshead

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