Global income inequality today

1
Global income inequality today

• Branko Milanovic
• Bergen, May 2009

Email bmilanovic_at_worldbank.org Based on the book
Worlds Apart, 2005
BM note this is an update of moscow2.ppt
2
1. Inequalities today
3
Three concepts of inequality defined
Concept 1 inequality
Concept 2 inequality
Concept 3 (global) inequalty
4
Inequality, 1950-2006The mother of all
inequality disputes
0.7
Global inequality (Concept 3)
0.6
Weighted international inequalty
Gini coefficient
(Concept 2)
Weighted international
inequality without China
0.5
Unweighted international inequality
(Concept 1)
0.4
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
5
Three concepts of inequality using the new 2005
PPPs (1950-2007)
1982
1990
2000
Graph in interyd\dofiles\defines.do
6
The impact of new PPPs

• Concept 2 inequality increases by almost 10 Gini
  points (a level shift)
• Somewhat steeper decline of Concept 2 inequality
  in the last decade (because India and China now
  appear poorer)
• About 5 Gini points increase in Concept 1
  inequality (shift effect no trend effect)
• About 5 Gini points increase in global inequality

7
(cont.)

• World poorer than thought, Asia in particular
• Inequality (in all formulations) greater
• Two engines of global equlization China and
  India

8
Concept 1 and Concept 2 inequality
Graph in interyd\dofiles\defines.do
9
2. Inequality between world citizens today
10
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?

11
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

12
The difficulty stems from contradictory movements

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

13
3. First calculations of global inequality from
household survey data alone
14
Population coverage
Non-triviality of the omitted countries (Maddison
vs. WDI)
15
GDI (US dollar) coverage
16
Number of surveys (C-based)
17
Global inequality (with 2005 PPPs)(distribution
of persons by PPP or US income per capita)
18
4. Importance of the differences in countries
mean incomes
19
Concept 1 inequality in historical perspective
Convergence/divergence during different economic
regimes
20
How are Concepts 2 and 3 related?

• In Gini terms
• where Giindividual country Gini, pincome
  share, yi country income, pi population
  share, µoverall mean income, n number of
  countries, Loverlap term

Concept 2
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A non-Marxist world

• Over the long run, decreasing importance of
  within-country inequalities despite the reversal
  in the last quarter century,
• Increasing importance of between-country
  inequalities (with some hopeful signs in the last
  5 year, before the current crisis),
• Global division between countries more than
  between classes

22
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)
23
A literary illustration Elizabeths dilemma
(from Pride and Prejudice)
1810 position estimates based on Colquhoun 1801-3
data. Y2K data from LIS (UK1999), and for 0.1
from Piketty (Data-central).
24
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.

25
Four Worlds in 1960
26
Four Worlds in 2003
27
Growth over 1980-2002 period as function of
initial (1980) income
28
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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(No Transcript)
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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.

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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(No Transcript)
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5. Global inequality (cont.)
33
More than fifty-fifty world (new PPPs)
34
How big is a Gini of 70? (Year 2002, 2005PPPs)
35
Different countries and income classes in global
income distribution (year 2002 new PPPS)
100
USA
90
Germany
80
70
Russia
Brazil
60
percentile of world income distribution
50
India
40
30
20
10
1
1
10
20
30
40
50
60
70
80
90
100
country percentile
36
Note

• Richest people in India barely intersect with
  poorest people in Germany
• Bottom 20 of Americans worse off than equivalent
  people in Germany
• But this is not true for Brazil and Russia about
  half of the population of Brazil better off than
  the very poorest percentile in Germany for
  Russia, it is 4/5.
• Russian better-off than Brazilians except at the
  top (note convexity at the top in Brazil)
• Important later for rules re. global transfers

37
Distribution of percentile of global income
distribution across five world regions
. graph box inc_c if maxgroup20, over(region)
use world2002.dta
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Global inequality of opportunity

• How much of variability of income persons global
  income can we explain with two exogenous
  circumstances persons country of citizenship
  and income class of his/her parents?
• Both circumstances basically given at birth
• With citizenship person receives several public
  goods income of country, its inequality level,
  and its intergenerational income mobility.

39
The answer is about 80 percent! (dependent
variable HH per capita income in PPP )
Base (optimistic, pessimistic) case about
intergenerational income mobility in different
parts of the world
40
6. Global financial crisis and global inequality
41
15 largest annual GDP per capita declines in the
United States history
42
Plutocratic and peoples recessions are not the
same thing
43
Plutocratic and peoples global growth rate in
years of plutocratic recessions
0.080
People's growth
0.060
rate
0.040
0.020
0.000
1982
1991
1930
1931
1932
1954
1958
1960
1975
-0.020
Plutocratic growth rate
-0.040
-0.060
-0.080
44
Shrinking GDPs
45
Who is affected more poor or rich countries?
46
The financial crisis 1890-95 relationship
between initial GDP per capita and its change
during the crisis
47
The Great Depression 1928-33 relationship
between initial GDP per capita and its change
during the crisis
48
World, by population, in the crisis 1930
49
Unweighted correlation coefficient between growth
rate and GDI per capita (in years of global
recession)
Negative coeff rich countries decline more.
50
World, by population, in the crisis 1991
51
But after 1973-75, the Third World took 25 years
to recover
52
Implications

• First negative effect will be mostly felt by rich
  people (in particular, those with high financial
  assets) and rich countries
• Rates of GDP will decline more in rich countries
• Then, the crisis will spread wider
• Difficult to predict next effects prices of raw
  materials, dependence on exports, amount of debt
• Possible replay of the period 1980-2000 when
  growth rate of Third World declined by more than
  1 percentage point

53
6. Globalization and income inequality
54
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?

55

• 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.

56
Conclusion The age of inequality?
Within-country inequalities have increased in
many countries including in the largest (US, UK,
China, India, Russia)
Inequalities between countries have increased
Population weighted inequality between countries
went down thanks to fast growth in China and
India (Caveat R/U differences in China and India
have global implications)
Inequality among people in the world is very high
(Gini around 70) but its direction of change is
not clear
57
7. Does Global Inequality Matter?
58

• No one in charge of it there is no global
  government
• No one can do much about it
• No global taxation authority

59
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.

60

• 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.

61
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)

62
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.

63
In addition transfers have national income
inequality implications
Progressive transfer at the global level and
worsening national distributions (may not be
politically sustainable)
64
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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• Book Worlds Apart Measuring International and
  Global Inequality, Princeton UP, 2005
• Email bmilanovic_at_worldbank.org
• Website http//econ.worldbank.org/projects/inequa
  lity

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Extra slides
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Share of between-country inequality in total
inequality (05 ICP)
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The rich and the poor (equal total income)
3500
Top global 1
57, 3316
3000
Top US decile
2500
29, 2531
2000
Poor people (in millaion)
1500
Top US percentile
1000
3, 990
500
0
0
10
20
30
40
50
60
Rich people (in million)
69
Percentage of global population living in
countries with negative growth (in years of
global plutocratic recession)