MBB Case – Consulting a Government

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The reason for these protests is economic poverty.

Potential framework to use: PESTLE

• Political: corruption, autocracy, little / no social benefits, low security requirements, barriers to trade, etc.
• Economic: economic poverty, low standard of living, low GDP, unemployment rate, etc.
• Social: social poverty, racism, lack of freedom of assembly, lack of inclusion, income distribution, education, security level, etc.
• Technological: low technical standards, no government investments in R&D, etc.
• Legal: lack of legal certainty, corruption, incision in fundamental rights, etc.
• Ecological: environment pollution, no fair trade, littering / garbage problems

• GDP of imaginary country: 1 trillion USD
• Number of inhabitants: 150 million

Distribution of GDP within population: Within the 5 quintiles of the population, the second one earns double the income of the first one, the third one earns double the income of the second one and so on.

We know that income double along the quintiles of the population. That is to say that the lowest earning 20% of population earn half of what the second-lowest earning 20% earn, and the second-lowest earning 20% earn again half of what the third lowest-earning 20% earn and so on. Please calculate the GDP per capita of the highest and lowest quintile.

1. In order to define how bad the poverty level is in comparison to other countries, compare the GDP per capita with other countries
2. To calculate the GDP per capita, following information is needed:

• Number of inhabitants
• GDP of country

The diagram shows that the client's average income level is relatively low (e.g., only ±3.6% of Monaco’s GDP per capita)

The country is on a similar level as Cuba and Equatorial Guinea which are rather poor countries

However when you look at the absolute rank of the country (52), it becomes clear that the client's country must rank in the upper 30% of all countries in the world (±200 countries). Therefore there must be another reason for these protests in this country – maybe the span between rich and poor is very large

Potential clustering in direct and indirect recommendations possible!

What can be the relevant actions to solve this problem? Brainstorming

• Lift up living standards of Q1 and Q2 to the level of Q3 (Q1 income = USD 32bn, Q2 income = USD 64bn, Q3 income = USD 128bn, --> ca. USD 160bn needed)
• Increase top tax rate (in DE: “Spitzensteuersatz”) - increase tax rate of rich people
• Increase tax rate for corporates
• Introduce minimum wage
• Increase social benefits
• Improve access to education
• Create new jobs (especially in the low wage sector)
• Invest in infrastructure, e.g. access to internet and computers to enable remote work for developed countries
• etc.

Recap: Our client is the government of an imaginary country which suffers from numerous protests.

• These protest exist due to economic poverty. This means a lack of economic means.
• First, GDP per capita is very low: The GDP per capita is USD 556 which is very low and similar to poorer countries like Cuba, and Equatorial Guinea.
• Second, the gap between rich and poor is very large: An average worker in the lowest income quintile (20% of population) earns only 6% of an average worker in the highest income quintile.

Recommendation: Raise the living standards of the lowest earning 40% of the population to equal the third quintiles' living standardf. This equates to a cost of USD 160 billion and can be achieved through two measures:

• Tax redistribution (immediately effective)
• Investment in education (long-term effective)

Next Steps:

• Consider for whom the tax increase should be carried out, e.g. for the top quintile or corporates, and to what extent such tax increase should take place.
• Detail out education strategy / execution plan

1. Calculation of GDP per capita
   X + 2X + 4X + 8X + 16X = USD 1 trillion
   31X = USD 1 trillion
   X = ca. USD 32 billion
2. Number of people within one quintile: 150 million / 5 = 30 million
3. Avg. of one worker in Q1 per year = 32 bn / 30 mn = USD 1,066.67
4. Avg. of one worker in Q1 per month = USD 1,066.67 / 12 = USD 88.89
5. Avg. of one worker in Q5 per year = USD 1,066.67 * 16 = USD 17,066
6. Avg. of one worker in Q5 per month = USD 17,066 / 12 = USD 1,422
7. Avg. worker in the first quintile earns only 6% of avg. worker in the fifth quintile