Wealth gap a growing problem worldwide
By Brian Gaynor
5:30 AM Saturday Jun 8, 2013 ✩Save
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Inequality is also regional and there is a widening gap between the generations
Youth unemployment, now 55.9% in Spain, has become a problem due to the demise of traditional low-skill industries and older workers being reluctant to retire. Photo / AP
Inequality is becoming a bigger and bigger concern throughout the world. The issue includes income and wealth inequality, which incorporates the gap between residential property owners and would-be first-home buyers.
The subject also includes regional inequality and the widening gap between the younger and older generations.
Inequality may be less of a problem in New Zealand than in other countries, but rising house prices are creating a big difference between those who own a home and those who do not.
The main problem with Europe has been its inability to adapt to a changing world, particularly the huge increase in imports of low-cost Asian manufactured goods which has taken a heavy toll on the region's traditional industries.
The northeast region of England, which was the country's industrial belt, is a good example of this.
The area has been particularly hard hit, and has an unemployment rate of 9.9 per cent compared with the national average of 7.8 per cent.
Middlesbrough, the original powerhouse of the UK steel industry, has 14.4 per cent unemployment and about 30 per cent of under-25s without jobs.
The city once dominated the world's steel industry and one of its companies, Dorman Long & Co, won the tender for the Sydney Harbour Bridge in the 1920s.
About 80 per cent of the steel used to build the bridge came from the UK, mainly Middlesbrough. The rest came from Australia.
Dorman Long is now based in Northamptonshire and has become a construction consultant and a designer and manufacturer of heavy lifting equipment.
The steel industry is now virtually extinct as are many of the other traditional industries in the north of England.
The Yorkshire and Humber region has an 8.9 per cent unemployment rate and only 44 per cent of households in this area have total wealth in excess of £250,000 ($488,600). The figure for the northeast region is 40 per cent, and the national average is 49 per cent.
But 72 per cent of households in the southeast region have total wealth of more than £250,000.
Wealth and ticket prices were an issue at the recent cricket test between England and New Zealand at Headingley in Yorkshire.
Locals complained that a minimum adult ticket price of £40 ($78) a day was far too high for the low-income region.
As a consequence, only 9,000 people attended the test on a sunny Saturday afternoon when traditionally the crowd would have been close to the ground's 16,000 capacity.
Yorkshire cricket fans are worried that all future tests will be allocated to the south of England because many northerners cannot afford to pay £40 a day.
The good news for the north of England is that Asia has not developed an internationally competitive food industry and the rural sector is in a better shape than the old industrial cities.
Quality food production is now a preferred industry for developed economies.
This is good news for New Zealand, particularly as we don't have any substantial large-scale sunset industries, such as steel.
Another major issue in Europe is the high youth - under 25 - unemployment rate.
Youth unemployment is now 59.1 per cent in Greece, 55.9 per cent in Spain, 38.4 per cent in Italy, 38.3 per cent in Portugal and 30.3 per cent in Ireland.
These figures tend to overstate the problem because individuals at universities and other educational institutions are not included in the total workforce figures and, as a consequence, the total youth workforce is small.
But youth unemployment has become a permanent problem because of the demise of the traditional low-skill industries and older workers - particularly those with white-collar jobs - being reluctant to retire.
One of the solutions to youth unemployment is to encourage young people to start their own businesses, to try to recreate the entrepreneurial environment that nurtured the great industries of England and Europe in the 18th and 19th centuries.
But where will the funding for these businesses come from?
The problem in Europe is that the banks dominate the financial sector and they are becoming more and more cautious, partially because of new regulations.
They prefer to finance the purchase of existing residential property rather than start-up businesses. This is one of the main reasons property prices are rising again throughout most of the developed world.
A similar trend has developed in New Zealand, where the banks are committing an ever-increasing percentage of their lending to residential property.
New business start-ups have to rely on a wide range of cash sources, including family and friends, wealthy individuals, government grants, venture capitalists, stock exchange IPOs and crowdfunding.
Bradford in the north of England encourages new businesses by giving rate rebates when companies move into the city or take on more staff.
As a result, a revitalised Bradford has a higher proportion of new start-ups and self-employed than most other UK cities.
Crowdfunding has also become increasingly popular in recent years.
It is a collective way to raise money, usually through the internet, for a variety of causes including political campaigns, making movies, disaster relief, scientific research, medical aid, charity projects and start-up companies.
Crowdfunding for start-up companies comes in two main forms:
• Debt-based crowdfunding enables investors to lend money to companies at high interest rates. Small British companies are willing to pay up to 13 per cent or more a year for these loans because banks are unwilling to provide money unless the owners offer their homes as security.
• Equity-based crowdfunding enables investors to become shareholders in a company for a small investment.
The UK Crowdfunding Association describes the activity thus: "Crowdfunding is a way of raising finance by asking a large number of people each for a small amount of money. Until recently, financing a business, project or venture involved asking a few people for large sums of money. Crowdfunding switches this idea around, using the internet to talk to thousands - if not millions - of potential funders."
One of the best known crowdfunding websites is
www.kickstarter.com in the United States.
The site claims that "more than 4.2 million people have pledged over US$647 million ($812 million), funding more than 42,000 creative projects" since 2009.
Crowdfunding will not replace family and friends, wealthy individuals, stock exchanges or venture capitalists as the main source of new equity but it is becoming increasingly important for start-ups.
The widely-held view in England and Europe is that a substantial increase in business start-ups is needed to help kick-start economic growth and reduce youth unemployment and inequalities between households and between regions.
But this is easier said than done because the banks are the main source of finance in Europe (and New Zealand) and they are much more interested in funding middle-aged, high-income earners into a £1 million home in the southeast of the UK than start-ups in Middlesbrough or Leeds.
The same is true in New Zealand as our banks would prefer to finance a $1 million house purchase in Remuera than new businesses in Greymouth, Ashburton or Invercargill.
This approach exacerbates the divide between regions. It also reinforces the gap between the young, who are unemployed or on low incomes, and the high-earning older generation who are established on the property ladder.
It demonstrates why venture capitalism, crowdfunding, stock exchanges and risk-taking by wealthy individuals have become more and more important since the devastation of the world's non-banking financial sector.
It also shows why the recent upturn in sharemarket activity, particularly IPOs, is extremely important to a widespread and sustainable economic recovery.
• Brian Gaynor is an executive director of Milford Asset Management
