Global income inequality: what it is and why it matters?

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Global income inequality what it is and whyit
matters?

• Branko Milanovic
• Moscow, 9-10 November 2006

Email bmilanovic_at_worldbank.org
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1. Inequalities today
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Three concepts of inequality defined
Concept 1 inequality
Concept 2 inequality
Concept 3 (global) inequalty
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Inequality, 1950-2002The mother of all
inequality disputes
Global Inequality
Concept 2 inequality
Concept 1 inequality
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2. Inequality between world citizens today
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Methodological issues

• GDI per capita or HS mean
• Definitional difference (HE, undisbursed
  profits) and
• Practical difference (under-surveying of the rich
  and under-reporting of property Y)
• Mixing of the two biases both poverty and
  inequality down
• Moreover, movements in NA and HS statistics are
  different
• If HS mean is it HSY or HSX?

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Methodological issues (cont.)

• Even if HS welfare indicator is selected
  definitions of X,Y vary in time btw. countries
• Issues self-employed Y, home C, imputation of
  housing, treatment of publicly provided HE, use
  of top coding, under-estimation of property
  incomes
• What PPP to use
• Equivalence scales intra-HH inequality

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The difficulty stems from contradictory movements

• Greater inequality within nations
• Greater differences between countries mean
  incomes (think of US vs. Africa)
• But catching up of large and poor countries
• All of these forces determine what happens to
  GLOBAL INEQUALITY (but they affect it
  differently)

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3. First calculations of global inequality from
household survey data alone
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Population coverage
1988 1993 1998 2002
Africa 48 76 67 63
Asia 93 95 94 95
EEurope 99 95 100 99
LAC 87 92 93 96
WENAO 92 95 97 99
World 87 92 92 92
Non-triviality of the omitted countries (Maddison
vs. WDI)
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GDI (US dollar) coverage
1988 1993 1998 2002
Africa 49 85 71 59
Asia 94 93 96 95
EEurope 99 96 100 99
LAC 90 93 95 95
WENAO 99 96 96 99
World 96 95 96 97
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Number of surveys (C-based)
1988 1993 1998 2002
Africa 14(11) 30(27) 24(24) 23(23)
Asia 19(10) 26(18) 28(20) 24(16)
EEurope 27(0) 22(0) 27(14) 27(16)
LAC 19(1) 20(4) 22(2) 21(1)
WENAO 23(0) 23(0) 21(3) 20(2)
World 102(22) 121(52) 122(63) 115(58)
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Global inequality
(distribution of persons by PPP or US income
per capita)
1988 1993 1998 2002
International dollars International dollars International dollars International dollars International dollars
Gini index 61.9 (1.8) 65.2 (1.8) 64.2 (1.9) 65.2 (1.6)
US dollars US dollars US dollars US dollars US dollars
Gini index 77.3 (1.3) 80.1 (1.2) 79.5 (1.4) 80.5 (1.1)
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4. Importance of differences between countries
mean incomes
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Composition of global inequality changed from
being mostly due to class (within-national),
today it is mostly due to location (where
people live between-national)
2000
1870
Based on Bourguignon-Morrisson (2002) and
Milanovic (2005)
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Share of between-country inequality in total
inequality
1988 1993 1998 2002
Between country Gini (PPP dollars) 51.6 54.2 53.1 54.9
Share of total inequality (in ) 83 83 83 84
Between country Gini (US dollars) 69.5 71.7 70.8 73.3
Share of of total inequality (in ) 89 90 89 91
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Define four worlds

• First World The West and its offshoots
• Take the poorest country of the First World (e.g.
  Portugal)
• Second world (the contenders) all those less
  than 1/3 poorer than Portugal.
• Third world all those 1/3 and 2/3 of the poorest
  rich country.
• Fourth world more than 2/3 below Portugal.

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Four Worlds 1960
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Four Worlds 2003
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Four worlds in 1960 and 2003
1960 1960 2003 2003
Number of countries of population Number of countries of population
First 41 26 27 16
Second 22 12 7 2
Third 39 13 29 37
Fourth 25 49 72 46
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Growth over 1980-2002 period as function of
initial (1980) income
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Population according to income of country where
they live (2000) an empty middle
India, Nigeria
China
Brazil, Russia
WEur, Japan
USA
Mexico
histogram gdpppp wpopu if year2000
gdpppplt32000 Dcont1, bin(20) percent
ylabel(0(10)40)
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The key borders today

• First to fourth world Greece vs. Macedonia and
  Albania Spain vs. Morocco (25km), Malaysia vs.
  Indonesia (3km)
• First to third world US vs. Mexico
• Germany vs. Poland Austria vs. Hungary

In 1960, the only key borders were Argentina and
Uruguay (first) vs. Brazil, Paraguay and Bolivia
(third world), and Australia (first) vs.
Indonesia (fourth)
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Year 2002 Year 1960
Approximate of foreign workers in labor force Ratio of real GDI per capita Ratio of real GDI per capita
Greece (Albanians) 7.5 4 to 1 2.2 to 1
Spain (Moroccans) 12.0 4.5 to 1 2.3 to 1
United States (Mexicans) gt10.0 4.3 to 1 3.6 to 1
Austria (former Yugoslavs) 10.0 2.7 to 1 2.6 to 1
Malaysia (Indonesians) gt10.0 5.3 to 1 1.5 to 1
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5. Global inequality (cont.)
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A 90-10 world fifty-fifty
Cumulative of world population Cumulative of PPP world income/consumption In a single country (UK)
5 0.2
10 0.7 2.0
25 2.9
50 9.6 25.0
75 24.7
90 50.4 71.5
Top 10 49.6 28.5
Top 5 32.7 18.4
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What is a Gini of 64-66 how big is it?
Top Bottom Ratio
In PPP 5 33 0.2 165-1
10 50 0.7 70-1
In US 5 45 0.15 300-1
10 67.5 0.45 150-1
5 countries 31,850 580 55-1
10 countries 28,066 660 42-1
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First order dominance (year 2002) expressed in
terms of percentile of world income distribution
100
Germany
80
Sri Lanka
60
Russia
percentile of world income distribution
Brazil
40
Indonesia
20
0
0
5
10
15
20
country ventile
twoway (line inc_c group if contcod"BRA") (line
inc_c group if contcod"RUS") (line inc_c
group if contcod"DEU") (line inc_c group if
contcod"IDN-R") (line inc_c group if
contcod"LKA"), legend(off) xtitle(country
ventile) ytitle(percentile of world income
distribution) text(92 5 "Germany")/ text(60 14
"Sri Lanka") text(58 4 "Russia") text(44 5
"Brazil")/ / text(35 10 "Indonesia")
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Note

• Not even richest people in rural Indonesia
  intersect with poorest people in Germany
• Very little overlap between people in Sri Lanka
  and Germany
• But this is not true for Brazil and Russia about
  a quarter of the population is better off than
  the poorest decile in Germany
• Important later for rules re. global transfers

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Poor and rich people and countries, 1998
People Countries Poor Middle income Rich Total
Poor 3879 210 96 4185
Middle 189 35 52 277
Rich 92 115 707 913
Total 4160 360 855 5375
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6. Globalization, policy convergence and income
divergence
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Causal effect of globalization (openness) on
global inequality

• Channel 1. Different effect on within-national
  income distributions (difference between poor and
  rich countries HOS and revisions)
• Channel 2. Different effect on growth rates of
  poor and rich countries (the openness premium
  should be higher for poor countries)
• Channel 3. Different effect on populous and small
  countries
• Depends on history are populous countries rich
  or poor at a given point in time?

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• Assume globalization is good for for poor,
  populous countries, no effect on within-national
  distribution
• In the current constellation, India and China
  grow faster gt global inequality ? (mean income
  convergence, lower global inequality)
• Decouple poor and populous let China and India
  be rich
• No change in individual effects of gloablization
  mean convergence continues but global inequality
  may now go ?
• Conclusion. Even if effects are known and
  unchanged, the outcome may differ.

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Transition countries continued output divergence
despite policy convergence
twoway (line EBRD_sd year) (line gdpppp_sd year,
yaxis(2)), legend(off) text(6.2 1997 "standard
deviation of all gt EBRD indicators") text(3.5
2000 "standard deviation of GDI per capita")
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LAC countries continued output divergence
despite policy convergence
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7. Does Global Inequality Matter?
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• No one in charge of it there is no global
  government
• No one can do much about it
• No global taxation authority

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Does global inequality matter?

• NO, according to Ann Krueger (2002)
• Poor people are desperate enough to improve
  their material conditions in absolute terms
  rather than to march up the income distribution.
  Hence it seems far better to focus on
  impoverishment than on inequality.

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• YES, according to Kuznets (1954)
• reduction of physical misery associated with
  low income and consumption levelspermits an
  increaseof political tensions
• BECAUSE
• the political misery of the poor, the tension
  created by the observation of the much greater
  wealth of other communitiesmay have only
  increased.

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What may be the effects of global inequality?

• Globalization increases awareness of differences
  in living standards (aspiration level changes
  empirical studies show it)
• Leads to migration
• Greater likelihood of conflict (Jennifer
  Government)

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We need some rules for global transfers

• They should flow from a rich to a poor country.
  That is easy.
• But they have to satisfy the same rules as at the
  national level, i.e.
• transfers should be globally progressive, that is
  flow from a richer person to a poorer person.

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In addition transfers have national income
inequality implications
Progressive transfer at the global level and
worsening national distributions (may not be
politically sustainable)
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Thus transfers have to satisfy

• Progressivity 1 reduce mean income differences
  between rich and poor countries
• Global progressivity tax payers should be richer
  than beneficiaries
• National progressivities in rich country, tax
  payers should be relatively rich (reduce rich
  country inequality) and in poor country,
  beneficiaries should be relatively poor (reduce
  poor country inequality)

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Mechanism of global transfers

• Transfers are no longer from state to state, or
  from inter-state organization to a state, but
  from global authority to poor citizens regardless
  of where they live (change in paradigm)
• A natural complement to global tax authority is
  relationship with (poor) citizens, not (poor)
  states

And in cash
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New Global Welfare Agency
Tax on commodities consumed by the rich people in
rich countries
Money collected by the Agency
Aid in cash given to different poor categories of
people in poor countries
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Several key points GCB

• Symmetrical treatment of poor and rich countries
  (limited sovereignty for both rich govts lose
  some tax-raising authority poor govt cannot
  decide the use of funds)
• No loans, but grants (pure transfers)
• No projects, but cash to citizens
• No fine targeting, but broad categories
• Use NGOs and citizen groups

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• Book Worlds Apart Measuring International and
  Global Inequality
• Email bmilanovic_at_worldbank.org
• Website http//econ.worldbank.org/projects/inequa
  lity