Global income inequality today

1
Global income inequality today

• Branko Milanovic
• Perugia, June 2009

Email bmilanovic_at_worldbank.org Based on the book
Worlds Apart, 2005 and updates
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 equalization 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
1988 1993 1998 2002
Africa 48 76 67 77
Asia 93 95 94 96
EEurope 99 95 100 97
LAC 87 92 93 96
WENAO 92 95 97 99
World 87 92 92 94
Non-triviality of the omitted countries (Maddison
vs. WDI)
15
GDI (US dollar) coverage
1988 1993 1998 2002
Africa 49 85 71 71
Asia 94 93 96 95
EEurope 99 96 100 99
LAC 90 93 95 95
WENAO 99 96 96 100
World 96 95 96 98
16
Number of surveys (C-based)
1988 1993 1998 2002
Africa 14(11) 30(27) 24(24) 30(29)
Asia 19(10) 26(18) 28(20) 26(18)
EEurope 27(0) 22(0) 27(14) 26(16)
LAC 19(1) 20(4) 22(2) 21(1)
WENAO 23(0) 23(0) 21(3) 21(2)
World 102(22) 121(52) 122(63) 124(66)
17
Global inequality (with 2005 PPPs)(distribution
of persons by PPP or US income per capita)
1988 1993 1998 2002
International dollars (PPP) International dollars (PPP) International dollars (PPP) International dollars (PPP) International dollars (PPP)
Gini index 68.4 (2.0) 70.0 (1.4) 69.4 (1.8) 70.8 (1.4)
Between compnt 61.8 62.6 62.1 63.9
US dollars US dollars US dollars US dollars US dollars
Gini index 77.8 (1.5) 80.4 (1.4) 79.6 (1.3) 81.0 (1.1)
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
21
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
  five years, 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)
Income in 1810 ( pa) Approx. position in 1810 income distribution
Mr. Darcy 10,000 Top 0.1
Elizabeths family 3000/7430 Top 1
Elizabeth alone 50 Median
Gain 100 to 1
Income around Y2K ( pc pa)
270,000
57,000
6,500
20 to 1
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 (2007) an empty middle
India, Indon, Bgd
China
USA
Brazil, Russia, Mexico
W Europe, Japan
histogram gdpppp wpopu if year2007
gdpppplt50000 Dcont1, bin(20) percent
ylabel(0(10)40) xtitle(GDP per capita in 2005 PPP)
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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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Year 2007 Year 1980
Approximate of foreign workers in labor force Ratio of real GDI per capita Ratio of real GDI per capita
Greece (Macedonian/Albanians) 7.5 4 to 1 2.1 to 1
Spain (Moroccans) 14.4 7.4 to 1 6.5 to 1
United States (Mexicans) 15.6 3.6 to 1 2.6 to 1
Malaysia (Indonesians) gt14.0 3.7 to 1 3.6 to 1
BLS, News Release March 2009 data for 2008
inclusive of undocumented aliens.
32
5. Global inequality (cont.)
33
More than fifty-fifty world (new PPPs)
Cumulative of world population Cumulative of PPP world income/consumption In a single country (UK)
5 0.24
10 0.6 2.0
25 2.1
50 6.6 25.0
75 17.8
90 42 71.5
Top 10 58 28.5
Top 5 38.6 18.4
34
How big is a Gini of 70? (Year 2002, 2005PPPs)
Top Bottom Ratio
In PPP dollars
5 percent 38 0.24 165-1
10 percent 58 0.6 95-1
In current
5 percent 45 0.15 300-1
10 percent 67.5 0.45 150-1
10 top countries 31,850 580 55-1
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 (02 WYD)
. graph box inc_c if maxgroup20, over(region)
use world2002.dta
38
100
Germany
90
Italy
80
Hungary
70
60
Serbia
50
percentile of world income distribution
40
30
Russia
20
10
1
1
5
10
15
20
country ventile
39
GDP per capita and Gini
40
Global inequality of opportunity

• How much of variability of income persons global
  income can we explain with two circumstances
  only 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.

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The answer is about 80 percent! (dependent
variable HH per capita income in PPP )
Base case Optimistic Pessimistic
Mean country income (PPP in logs) 0.99 (0) 0.99 (0) 0.99 (0)
Gini index -0.019 (0) -0.019 (0) -0.019 (0)
Parents national income class (from 1 to 20) 0.105 (0) 0.100 (0) 0.110 (0)
Adj. R2 0.81 0.80 0.83
Based on 116 countries, 20 ventiles for each, year 2002 Based on 116 countries, 20 ventiles for each, year 2002 Based on 116 countries, 20 ventiles for each, year 2002 Based on 116 countries, 20 ventiles for each, year 2002
Base (optimistic, pessimistic) case about
intergenerational income mobility in different
parts of the world
42
6. Global financial crisis and global inequality
43
15 largest annual GDP per capita declines in the
United States history
44
Plutocratic and peoples recessions are not the
same thing
45
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
46
Shrinking GDPs
47
Who is affected more poor or rich countries?
48
The financial crisis 1890-95 relationship
between initial GDP per capita and its change
during the crisis
49
The Great Depression 1928-33 relationship
between initial GDP per capita and its change
during the crisis
50
World, by population, in the crisis 1930
twoway (scatter dlngdpppp laggdpppp if
year1930 wpop) (lowess dlngdpppp laggdp gt
ppp if year1930), yline(0) ytitle(growth rate)
legend(off) xtitle(GDP per capita gt in 1929)
from maddison_polity2.dta
51
Unweighted correlation coefficient between growth
rate and GDI per capita (in years of global
recession)
Negative coeff rich countries decline more.
52
World, by population, in the crisis 1991
twoway (scatter dlngdpppp laggdpppp if year1991
dlngdpppplt0.1 dlngdppppgt-0.1 wpop)
(lowess dlngdpppp laggdpppp if year1991),
yline(0) ytitle(growth rate) legend(off)
xtitle(GDP per capita in 1990) from
maddison_polity2.dta
53
But after 1973-75, the Third World took 25 years
to recover
54
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

55
6. Globalization and income inequality
56
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?

57

• 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.

58
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
59
7. Does Global Inequality Matter?
60

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

61
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.

62

• 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.

63
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)

64
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.

65
In addition transfers have national income
inequality implications
Progressive transfer at the global level and
worsening national distributions (may not be
politically sustainable)
66
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)

67

• 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
69
Share of between-country inequality in total
inequality (05 ICP)
1988 1993 1998 2002
Between country Gini (PPP dollars) 61.8 62.6 62.1 63.9
Share of total inequality (in ) 90 89 89 90
Between country Gini (US dollars) 69.5 71.7 70.8 73.3
Share of of total inequality (in ) 89 90 89 91
70
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)
71
Percentage of global population living in
countries with negative growth (in years of
global plutocratic recession)