BECAUSE I WAS BROUGHT UP IN AN EMERGING ECONOMY I’VE ALWAYS seen the West as an aberration with underdevelopment and poverty the norm. That point of view has some defects, but as a tool of economic analysis it is often a helpful way to analyse Western economies to think of them as unusual rather than the norm.
During the period when only a small part (roughly 15%) of the world’s population had benefited from industrialisation, the West had an effective monopoly of the supply of sophisticated products. With a culture roughly shared between North America and Europe (and with Japan, the only non-Western economy to have broken the monopoly at that time, subject to pressure to adjust its exchange rate to keep it uncompetitive), these countries built up a cost base and a system of social protection that reflected the lack of competition from low cost economies.
With globalisation and the emergence of competition from lower cost economies putting a ceiling on pay levels for less skilled jobs in the West, the high cost of living that has developed over time is now becoming a factor that is reducing living standards for the poorest people in the West. Both poverty and inequality can be reduced by driving down the cost of living, especially for basics such as food and housing. Somewhat unexpectedly, the high cost of mobile telephony in the West is also a factor driving increased inequality.1
Keeping down the costs of basics
In Western economies many basic costs have been allowed to balloon up while the economies were generally prosperous and had standards of living many times higher than those in the emerging or less developed economies.
Now, when the level of prosperity in Western economies for poorer people is often lower, ratcheting these costs back down again would do much to improve the situation of the least well-off. Within the Western world these high prices are especially prominent in Europe and less so in the US. This reflects three factors: first, the high levels of public expenditure in many European countries which are being reflected in consumption taxes such as VAT as well as in high social charges which put up the cost of labour and hence feed through into prices; second, the tendency in Europe to favour producer interests that lead to higher prices; and third, the particular tendency in the EU to support agricultural interests leading to expensive food (and also the impact of the EU’s opposition to genetic modification and its effects on food prices), although the US is by no means innocent in this area.
Figure 16. IMF comparison of the cost of living by country
Source: IMF.
Costs are high in Europe also as a result of weaknesses in competition policy and a result of planning and agricultural policies that push up the costs of housing and food.
Figure 16 shows how high the cost of living is in the West generally. It gives IMF data using cost of living baskets for different countries.
One example of how the previously richer countries in the West are much more expensive than the newly richer countries in the East is given by the data for Singapore. Singapore is rather more prosperous than most Western economies, yet its cost of living is only 62.4% of that in the US and 61.8% of the cost of living in the UK.
Table 8 shows more recent data from the AOL cost of living comparison for June 2016 looking at selected food items. And although there are clearly some questions to be asked about the cost comparisons (some of the data looks implausible) it does give a clear impression that the cost of living is noticeably higher in the West than elsewhere and that it is also rather higher in Europe than in the US.
It is worth looking in much more detail at two items which enter differentially into the cost of living of the poor and the rich.
Using US data and excluding cash contributions, the poorest quintile in the US spend 18.1% of their expenditure on food and 44.8% on housing. These two items alone account for just short of two thirds of their total expenditure. By comparison the richest quintile spend only 12.5% on food and 20.2% on housing.2 These proportions are likely to be similar for other advanced economies.
Thus expensive food and housing are likely particularly to impact on the standards of living of the poorest groups.
Tables 8 and 9 compare the costs of some basic foods in different parts of the US with those costs elsewhere in the world. Of the items identified only chicken is cheaper in the US than in the emerging economies. Bread, milk, eggs and vegetables are many times more expensive in the US. But the situation in Europe looks to be even worse, with food costs roughly twice those in the US, let alone the emerging economies.
The high basic costs of living make a major contribution to inequality, penalising the poor disproportionately.
Table 8. Comparison of the cost of selected foods in the West and elsewhere
| Chicken | Bread | Coffee |
| Sample of U.S. Prices: | Sample of U.S. Prices: | Sample of U.S. Prices: |
| Portland, Ore.: $1.59 | Portland, Ore.: $1.79 | Portland, Ore.: $8.99 |
| Little Rock, Ark.: $0.88 | Little Rock, Ark.: $1.97 | Little Rock, Ark.: $5.99 |
| Los Angeles, Calif.: $1.59 | Los Angeles, Calif.: $2.29 | Los Angeles, Calif.: $11.19 |
| Sample of World Prices: | Sample of World Prices: | Sample of World Prices: |
| Kuwait: $2.01 | India: $0.28 | Kuwait: $0.27 |
| Spain: $2.03 | London: $0.74 | Brazil: $2.10 |
| Hong Kong: $2.50 | Moscow: $0.77 | Belgium: $4.13 |
| Taiwan: $2.92 | Brazil: $1.17 | Hong Kong: $5.00 |
| Brazil: $3.79 | South Africa: $1.27 | Paris: $7.00 |
| South Africa: $3.85 | Germany: $2.50 | Spain: $7.11 |
| Germany: $6.00 | Australia: $4.22 | South Africa: $14.34 |
| Paris: $6.37 | Spain: $6.23 | London: $18.26 |
Source: AOL online June 2016.
Table 9. Comparison of the cost of selected foods in the West and elsewhere
| Milk | Eggs | Lettuce |
| Sample of U.S. Prices: | Sample of U.S. Prices: | Sample of U.S. Prices: |
| Portland, Ore.: $1.99 | Portland, Ore.: $2.29 | Portland, Ore.: $1.39 |
| Little Rock, Ark.: $2.33 | Little Rock, Ark.: $1.00 | Little Rock, Ark.: $1.34 |
| Los Angeles, Calif.: $2.49 | Los Angeles, Calif.: $5.99 | Los Angeles, Calif.: $1.79 |
| Sample of World Prices: | Sample of World Prices: | Sample of World Prices: |
| India: $0.70 | India: $0.39 | Brazil: $0.43 |
| Brazil: $1.02 | Brazil: $0.84 | Canada: $1.47 |
| South Africa: $1.03 | Hong Kong: $1.80 | Germany: $1.56 |
| Paris: $1.79 | Kuwait: $2.33 | London: $1.58 |
| Hong Kong: $2.00 | Moscow: $3.39 | Moscow: $1.88 |
| Moscow: $3.89 | Belgium: $4.09 | Australia: $1.97 |
| Canada: $3.92 | Australia: $4.80 | Paris: $3.07 |
| Taiwan: $4.60 | London: $5.28 | Kuwait: $4.52 |
Source: AOL online June 2016.
Table 10 looks at the costs of a monthly rental for a one bedroom apartment outside a city centre. Obviously it is likely that there are some weaknesses with the data, but three points are clear. First, costs are noticeably higher in the West than in the emerging economies (though Berlin and Rome are exceptions). Second, Singapore and Hong Kong, both of which have very limited land availability but also have tight zoning regulations, have relatively high costs, as has Dubai. Third, the UK and the US are noticeably expensive. Again these are countries with tight zoning regulations.
Table 10. Comparative costs of monthly rental for one-bedroom apartment outside city centre (costs in euro)3
| Germany | Berlin | 482.96 |
| Italy | Rome | 350 |
| France | Paris | 752.73 |
| UK | London | 1300.13 |
| US | New York | 1627.56 |
| US | Los Angeles | 1232.04 |
| US | Atlanta | 778.22 |
| Singapore | 1271.29 | |
| Hong Kong | 1249.29 | |
| South Africa | Johannesburg | 317.87 |
| Dubai | 1266.19 | |
| China | Beijing | 524.92 |
| India | Mumbai | 246.6 |
| Korea | Seoul | 584.51 |
| Mexico | Mexico City | 277.36 |
| Brazil | Rio de Janiero | 397.38 |
| Japan | Tokyo | 676.72 |
| Nigeria | Lagos | 40.7 |
Source: Numbeo Property Prices comparison https://www.numbeo.com/property-investment/compare_cities.jsp?country1=Nigeria&country2=Italy&city1=Lagos&city2=Anzio+%28Rome%29&tracking=getDispatchComparison.
The previous chapter shows that a key factor driving up the cost of living in any locality is likely to be its zoning restrictions. When these artificially drive up the cost of property they contribute to inequality. Our calculations suggest that much of the potential benefits to poorer groups from economic growth in cities like Singapore, Hong Kong, London and New York is eroded by the rising cost of housing. Removing or amending the restrictions that push up the price of housing would make a major contribution to improving the standard of living of poorer people in these cities particularly.
Therefore, as with food, to the extent that supply and demand conditions can be adjusted to bring down the cost of housing, it is likely that there will be a significant amelioration in economic inequality.
There is one other basic expenditure which enters into the cost of living of all but the very most impoverished people – the cost of running a mobile phone. Poor people (the bottom quintile of expenditure) spend 6.7% of their total expenditure on mobile telephony in the US. The top quintile spend only 2.1%.4 It is likely that this ratio is roughly similar in other economies.
Table 11 shows the amazing variation in the monthly cost of running a mobile phone around the world. Given that this is a natural monopoly that is highly regulated in different countries, it is likely that there is scope to bring some of the costs in the more expensive countries down closer to the lower cost levels. And as the calculations above show, cutting the costs of mobile telephony benefits the poor three times as much as it benefits the rich.
Table 11. Monthly cost of running a mobile phone by country at market exchange rates ($ per month)5
| US | 35.62 |
| France | 40.27 |
| Germany | 18.02 |
| UK | 16.45 |
| Italy | 15.92 |
| Spain | 37.8 |
| Singapore | 8.63 |
| Hong Kong | 5.96 |
| China | 4.07 |
| India | 2.8 |
| Korea | 19.32 |
| Japan | 33.64 |
| Russia | 6.09 |
| South Africa | 10.23 |
| Emirates | 9.89 |
| Mexico | 11.12 |
Source: International Telecommunications Union (Table 4.2 in the ITU’s Measuring the Information Society 2015).
What all this shows is that there is considerable scope to bring down the cost of living for basics that would substantially reduce inequality in real terms in the Western world as well as sharply reducing poverty.
In the West these items were allowed to become expensive at times when the cost of living was of less concern because of the prosperity in the West that came with a monopoly in the supply of sophisticated goods. Now, after globalisation, Western economies need to bring down these costs again. This particular problem is more acute in Europe than in the US. There is some hope for the UK in this regard, because some of the problems, particularly those resulting from expensive food, may be alleviated as the UK leaves the EU.