Global income inequality: what it is and why it matters?
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Global income inequality: what it is and why
it matters?
Branko Milanovic
Moscow, 9-10 November 2006
Email: [email protected]
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1. Inequalities today
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Three concepts of inequality definedConcept 1 inequality
Concept 2 inequality
Concept 3 (global) inequalty
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Inequality, 1950-2002:The mother of all inequality disputes
0.4
0.5
0.6
0.7
Year
Gin
i Ind
ex
World unweighted World population-weighted World weighted except China
Global Inequality
Concept 1 inequality
Concept 2 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 (H&E, 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 H&E, 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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1988 1993 1998 2002
International dollars
Gini index
61.9
(1.8)
65.2
(1.8)
64.2
(1.9)
65.2
(1.6)
US dollars
Gini index
77.3
(1.3)
80.1
(1.2)
79.5
(1.4)
80.5
(1.1)
Global inequality(distribution of persons by $PPP or US$ income per capita)
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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)
0
10
20
30
40
50
60
70
80
90
1870 2000
C lass
Location
Location
Class
1870
2000
Based on Bourguignon-Morrisson (2002) and Milanovic (2005)
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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
Share of between-country inequality in total inequality
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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 20031960 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
010
20
30
40
Perc
ent
0 10000 20000 30000gdp per capita in ppp
China
India, Nigeria
WEur, Japan USA
Brazil, Russia
Mexico
histogram gdpppp [w=popu] if year==2000 & gdpppp<32000 & Dcont==1, 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
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)
>10.0 4.3 to 1 3.6 to 1
Austria (former Yugoslavs)
10.0 2.7 to 1 2.6 to 1
Malaysia
(Indonesians)
>10.0 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-fiftyCumulative % 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
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")
Germany
Sri LankaRussia
Brazil
Indonesia
02
04
06
08
01
00
pe
rce
ntil
e o
f w
orld
inco
me
dis
trib
utio
n
0 5 10 15 20country ventile
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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 => 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 > EBRD indicators") text(3.5 2000 "standard deviation of GDI per capita")
standard deviation of all EBRD indicators
standard deviation of GDI per capita
2000
2500
3000
3500
st d
ev. o
f gdp
ppp
per
capi
ta
23
45
6st
dev
of a
ll E
BR
D in
dica
tors
1990 1995 2000 2005Year...
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LAC countries: continued output divergence despite policy convergence
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
1985-1988 1988-1991 1992-1994 1995-1997 1998-1999
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
4
St deviation of the Lora reform indexindicator
St. deviation of GDI per capita
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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 levels…permit[s] an increase…of political tensions”
BECAUSE
“the political misery of the poor, the tension created by the observation of the much greater wealth of other communities…may 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)
T B
Income
Income distribution in poor country
Income distribution in rich country
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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 AgencyTax 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: [email protected]
• Website: http://econ.worldbank.org/projects/inequality