Inequality - pages.nes.rupages.nes.ru/abremzen/materials/Guriev5.pdfLorenz curve is moving farther...

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Inequality Inequality

Transcript of Inequality - pages.nes.rupages.nes.ru/abremzen/materials/Guriev5.pdfLorenz curve is moving farther...

Page 1: Inequality - pages.nes.rupages.nes.ru/abremzen/materials/Guriev5.pdfLorenz curve is moving farther from perfect equality line Source: Sala-i-Martin, 2002 . Properties of Lorenz curve

InequalityInequality

Page 2: Inequality - pages.nes.rupages.nes.ru/abremzen/materials/Guriev5.pdfLorenz curve is moving farther from perfect equality line Source: Sala-i-Martin, 2002 . Properties of Lorenz curve

PlanPlan

• What is inequality• How to measure inequality• How does inequality affect development• How is inequality affected by development

Page 3: Inequality - pages.nes.rupages.nes.ru/abremzen/materials/Guriev5.pdfLorenz curve is moving farther from perfect equality line Source: Sala-i-Martin, 2002 . Properties of Lorenz curve

InequalityInequality• Unequal outcomes vs unequal initial conditions• Income inequality vs wealth inequality

– Wealth inequality is what matters– Income inequality is easier to measure

• Even in the US, high intergenerational correlation within family– Parents’ wealth (and human capital) affects children’s

opportunities• Developing countries:

– Imperfect financial markets– Low initial wealth ⇒ low income ⇒ low wealth– Wealth inequality and income inequality are correlated

Page 4: Inequality - pages.nes.rupages.nes.ru/abremzen/materials/Guriev5.pdfLorenz curve is moving farther from perfect equality line Source: Sala-i-Martin, 2002 . Properties of Lorenz curve

How to measure inequalityHow to measure inequality

• Calculate income distribution– How many people earn <$1/day, <$2/day,

<$3/day etc• Kuznets ratios:

– Income of top 10% to income of bottom 10% …

– .. Or top 20% to bottom 40% etc.• Lorentz curve and Gini Index

Page 5: Inequality - pages.nes.rupages.nes.ru/abremzen/materials/Guriev5.pdfLorenz curve is moving farther from perfect equality line Source: Sala-i-Martin, 2002 . Properties of Lorenz curve

Income distribution (Argentina, 1995)Income distribution (Argentina, 1995)

99,737,390-100%62,415,480-90%47,011,370-80%35,79,060-70%26,77,450-60%19,36,140-50%13,24,930-40%8,33,920-30%4,42,710-20%1,71,70-10%

CumulativeShare in incomeDistribution decile

Page 6: Inequality - pages.nes.rupages.nes.ru/abremzen/materials/Guriev5.pdfLorenz curve is moving farther from perfect equality line Source: Sala-i-Martin, 2002 . Properties of Lorenz curve

Lorenz curve, Argentina 1995Lorenz curve, Argentina 1995

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Page 7: Inequality - pages.nes.rupages.nes.ru/abremzen/materials/Guriev5.pdfLorenz curve is moving farther from perfect equality line Source: Sala-i-Martin, 2002 . Properties of Lorenz curve

Comparing Lorenz curvesComparing Lorenz curves

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Page 8: Inequality - pages.nes.rupages.nes.ru/abremzen/materials/Guriev5.pdfLorenz curve is moving farther from perfect equality line Source: Sala-i-Martin, 2002 . Properties of Lorenz curve

Dynamics of income distribution in China: Dynamics of income distribution in China: Lorenz curve is moving farther from perfect equality lineLorenz curve is moving farther from perfect equality line

Source: Sala-i-Martin, 2002

Page 9: Inequality - pages.nes.rupages.nes.ru/abremzen/materials/Guriev5.pdfLorenz curve is moving farther from perfect equality line Source: Sala-i-Martin, 2002 . Properties of Lorenz curve

Properties of Lorenz curveProperties of Lorenz curve• Lorenz-curve-based comparisons satisfy

– Anonimity– Population principle– Relative income principle– Dalton principle

• Redistributing from rich to poor decreases inequality

• But what if Lorenz curves cross?– Gini index: the ‘average distance’ to perfect

equality line

Page 10: Inequality - pages.nes.rupages.nes.ru/abremzen/materials/Guriev5.pdfLorenz curve is moving farther from perfect equality line Source: Sala-i-Martin, 2002 . Properties of Lorenz curve

GiniGini in selected countries, in selected countries, 19961996

0.45USA0.30Germany0.50Zambia0.36India

0.39UK0.27Czech Rep0.27Sweden0.28China 0.42Russia0.56Chile 0.51Nigeria0.59Brazil0.31Korea0.30Belgium0.37Indonesia 0.46Argentina

Page 11: Inequality - pages.nes.rupages.nes.ru/abremzen/materials/Guriev5.pdfLorenz curve is moving farther from perfect equality line Source: Sala-i-Martin, 2002 . Properties of Lorenz curve

GiniGini stable over time?stable over time?

Gini, Argentina

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US Gini over time

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Page 12: Inequality - pages.nes.rupages.nes.ru/abremzen/materials/Guriev5.pdfLorenz curve is moving farther from perfect equality line Source: Sala-i-Martin, 2002 . Properties of Lorenz curve

…… or (very) slowly decreasing?or (very) slowly decreasing?

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Global Gini index. Source: Sala-i-Martin, 2002

Page 13: Inequality - pages.nes.rupages.nes.ru/abremzen/materials/Guriev5.pdfLorenz curve is moving farther from perfect equality line Source: Sala-i-Martin, 2002 . Properties of Lorenz curve

…… or or KuznetsKuznets’’ curve?curve?• Kuznets (1955):

– Based on cross-country data: Inequality increases with development but then falls

• Worldbank (Deininger and Squire, 1996): – Kuznets’ curve is consistent with cross-section data

(fig. 7.1 in Ray)– But much of it due to ‘Latin American effect’?

• Regressions reject Kuznets’ curve

• What happens over time in a single country?

Page 14: Inequality - pages.nes.rupages.nes.ru/abremzen/materials/Guriev5.pdfLorenz curve is moving farther from perfect equality line Source: Sala-i-Martin, 2002 . Properties of Lorenz curve

Brazil Brazil vsvs KoreaKorea

Brazil vs Korea, 1960-1989

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Page 15: Inequality - pages.nes.rupages.nes.ru/abremzen/materials/Guriev5.pdfLorenz curve is moving farther from perfect equality line Source: Sala-i-Martin, 2002 . Properties of Lorenz curve

Brazil Brazil vsvs Korea, 1960Korea, 1960--19891989Brazil vs. Korea: Kuznets' curve over time

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Page 16: Inequality - pages.nes.rupages.nes.ru/abremzen/materials/Guriev5.pdfLorenz curve is moving farther from perfect equality line Source: Sala-i-Martin, 2002 . Properties of Lorenz curve

The effect of inequalityThe effect of inequality

• Inequality is bad per se, but it may also (adversely) affect growth through– Social conflict and resulting redistribution– Distortions in occupational choice– Subversion of political and economic

institutions

Page 17: Inequality - pages.nes.rupages.nes.ru/abremzen/materials/Guriev5.pdfLorenz curve is moving farther from perfect equality line Source: Sala-i-Martin, 2002 . Properties of Lorenz curve

Inequality and growth: Inequality and growth: empirical evidence empirical evidence

• Cross-country regressions:– Negative correlation

• Panel regressions (based on ‘high-quality sample’):– Positive – OECD countries overrepresented in the sample, even for them,

cross-country comparisons are more reliable than across-time within-country

• Three-stage least squares– No effect on average– Negative in poor countries, positive in rich countries

• Instrumental variables:– Negative

• Non-parametric methods:– Non-linear

Page 18: Inequality - pages.nes.rupages.nes.ru/abremzen/materials/Guriev5.pdfLorenz curve is moving farther from perfect equality line Source: Sala-i-Martin, 2002 . Properties of Lorenz curve

Inequality, social conflict, Inequality, social conflict, redistribution and developmentredistribution and development

Alesina-Rodrik• In democracies or dictatorships, majority

matters• Inequality: median (pivotal) voter is usually

poorer than average voter• Hence, in equilibrium, capital is taxed too

much in favor of labor– Lower incentives to invest ⇒ Lower growth

Page 19: Inequality - pages.nes.rupages.nes.ru/abremzen/materials/Guriev5.pdfLorenz curve is moving farther from perfect equality line Source: Sala-i-Martin, 2002 . Properties of Lorenz curve

Subversion of institutionsSubversion of institutions• Since redistribution in favor of majority is

more likely in democracy, the rich respond with coups– If coups succeed, rich redistribute in their

favor by subverting political and economic institutions (Glaeser, Scheinkman, Shleifer, 2003)

– If there are political economies of scale in redistribution, rich may be able to redistribute from the poor (Sonin, 2003)

Page 20: Inequality - pages.nes.rupages.nes.ru/abremzen/materials/Guriev5.pdfLorenz curve is moving farther from perfect equality line Source: Sala-i-Martin, 2002 . Properties of Lorenz curve

Latin America Latin America (Acemoglu and Robinson, 2001)(Acemoglu and Robinson, 2001)

“In Argentina, for example, universal male suffrage became effective in 1912. But it was soon overthrown by a coup in 1930. Democracy was reinstated in 1946, but fell to a coup in 1955, re-created again in 1973, subverted again in 1976, and finally reinstalled in 1983.”

“For example, in Brazil, a central aim of the coup in 1964 was to prevent the attempt by the left-wing President Goulart to bypass the veto of the Congress and use other means to push through agrarian reform …. Similarly, most scholars argue that the agrarian reform after 1952 in Guatemala was the main motivation for the coup of 1954 …”

“For example, in Venezuela in 1948, Guatemala in 1954, and Chile in 1973, landowners were rewarded for supporting the coup by having their land returned to them.”

Page 21: Inequality - pages.nes.rupages.nes.ru/abremzen/materials/Guriev5.pdfLorenz curve is moving farther from perfect equality line Source: Sala-i-Martin, 2002 . Properties of Lorenz curve

Inequality and resistance to reformsInequality and resistance to reforms(Fernandez and (Fernandez and RodrikRodrik, 1994), 1994)

Inequality prevents many efficiency-enhancing reforms• Simple model: two classes, winners W (40%) and losers

L (60%)• Reform:

– Will bring each W +300– Will bring each L

• -300 with probability 2/3• +300 with probability 1/3• On average: -100

• Total welfare: 300*0.4+300*0.2-300*0.4=60>0• Voting on reform ex ante:

– The majority (60%) is against• Voting on reform ex post:

– The majority (40%+20%) would be in favor

Page 22: Inequality - pages.nes.rupages.nes.ru/abremzen/materials/Guriev5.pdfLorenz curve is moving farther from perfect equality line Source: Sala-i-Martin, 2002 . Properties of Lorenz curve

Dynamic model of resistance to Dynamic model of resistance to reform (reform (AlesinaAlesina DrazenDrazen))

• Two parts of the society• Need a consensus on whom to allocate

the burden• War of attrition

– In the case of symmetric information, reform would take place right away

– Under asymmetric information, the reform is delayed

Page 23: Inequality - pages.nes.rupages.nes.ru/abremzen/materials/Guriev5.pdfLorenz curve is moving farther from perfect equality line Source: Sala-i-Martin, 2002 . Properties of Lorenz curve

Inequality and occupational choice Inequality and occupational choice (back to (back to BanerjeeBanerjee--Newman)Newman)

Imperfect financial markets:Low income and low wealth ⇒ Limited ability to borrow

Inequality ⇒ higher share of population cannot start small/large business ⇒are bound to work for hire ⇒labor is cheaper ⇒those who do start business benefit ⇒returns to entrepreneurship ↑⇒benefits may or may not trickle down to the poor

Depends on initial conditions whether the economy breaks the vicious circle

Page 24: Inequality - pages.nes.rupages.nes.ru/abremzen/materials/Guriev5.pdfLorenz curve is moving farther from perfect equality line Source: Sala-i-Martin, 2002 . Properties of Lorenz curve

Equilibrium: high initial Equilibrium: high initial inequality begets inequalityinequality begets inequality

wage

Subsistence

Labor supplyLabor demand

Labor

Equilibrium wage does not allow saving ⇒in the future, workers will have no outside option ⇒wage will remain low ⇒ inequality will rise (rich will grow richer)

Page 25: Inequality - pages.nes.rupages.nes.ru/abremzen/materials/Guriev5.pdfLorenz curve is moving farther from perfect equality line Source: Sala-i-Martin, 2002 . Properties of Lorenz curve

Low initial inequality: the vicious Low initial inequality: the vicious circle of inequality can be brokencircle of inequality can be broken

wage

Subsistence

Labor supplyLabor demand

Labor

Equilibrium wage is above subsistence ⇒ even the poorest workers will save ⇒in the future, many workers will have outside option ⇒wage will increase even further ⇒ inequality will decrease

Equilibrium wage

Page 26: Inequality - pages.nes.rupages.nes.ru/abremzen/materials/Guriev5.pdfLorenz curve is moving farther from perfect equality line Source: Sala-i-Martin, 2002 . Properties of Lorenz curve

Why can inequality be Why can inequality be positively positively correlated with growth?correlated with growth?

• Classical view– Adam Smith (and Kaldor):

• Rich save more ⇒ inequality increases savings ⇒ investment and growth

• Galor and Moav (2003):The logic should work in the early stages of growth (based on physical capital)

• Once human capital becomes important, accumulation by few is constrained

• Each individual faces diminishing marginal returns to human capital accumulation

• Inequality is harmful for further growth– Indivisibilities– Incentives

• Reverse causality: growth occurs in modern sectors ⇒skilled individuals gain even more, inequality may increase

Page 27: Inequality - pages.nes.rupages.nes.ru/abremzen/materials/Guriev5.pdfLorenz curve is moving farther from perfect equality line Source: Sala-i-Martin, 2002 . Properties of Lorenz curve

Why inequality?Why inequality?

• Natural resources endowment: natural resource abundance is bad for economic growth (Sachs and Warner, 1995)– Dutch disease and increasing returns in

manufacturing– Rent-seeking, inefficient politics, and

inequality

Page 28: Inequality - pages.nes.rupages.nes.ru/abremzen/materials/Guriev5.pdfLorenz curve is moving farther from perfect equality line Source: Sala-i-Martin, 2002 . Properties of Lorenz curve

SachSach and Warner (1995)and Warner (1995)GDPpc growth rate, 1971-89

Natural resource exports / GDP, 1970

Page 29: Inequality - pages.nes.rupages.nes.ru/abremzen/materials/Guriev5.pdfLorenz curve is moving farther from perfect equality line Source: Sala-i-Martin, 2002 . Properties of Lorenz curve

Determinants of inequality: Determinants of inequality: the case study of South the case study of South vsvs North America North America

((EngermannEngermann--SokoloffSokoloff, 2000), 2000)• South America was not behind US/Canada in 1800, and

certainly not before• 1600-1800: crucial role of slaves in all colonies• South America: sugar, coffee, silver

– Large plantations/mines• North America: wheat, maize

– Family farms, indentured servitude of European immigrants, rather than slavery

– Even large cotton, tobacco, rice plantations in US South small relative to South American ones

• Endogenous immigration policy: open to Europeans in US, tight in Spanish colonies

• Therefore emergence of middle class in the US but not in South America

• Antitrust in the US in 1900s

Page 30: Inequality - pages.nes.rupages.nes.ru/abremzen/materials/Guriev5.pdfLorenz curve is moving farther from perfect equality line Source: Sala-i-Martin, 2002 . Properties of Lorenz curve

Natural resources and inequality, 1994

010203040506070

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Gin

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Page 31: Inequality - pages.nes.rupages.nes.ru/abremzen/materials/Guriev5.pdfLorenz curve is moving farther from perfect equality line Source: Sala-i-Martin, 2002 . Properties of Lorenz curve

Important exception: Botswana Important exception: Botswana (Acemoglu(Acemoglu--JohnsonJohnson--Robinson)Robinson)

• High initial inequality: Gini about 0.57 (!)• Fastest growth rates in 1965-2000 in the

world (7.7% p.a.)• Natural resource abundance:

– diamonds• Still has been able to maintain good

economic policy– Why?

Page 32: Inequality - pages.nes.rupages.nes.ru/abremzen/materials/Guriev5.pdfLorenz curve is moving farther from perfect equality line Source: Sala-i-Martin, 2002 . Properties of Lorenz curve

The big question: The big question: WhitherWhither China?China?

• Mid 1970s: Very equal but very poor

• Development strategy of Dan and Jiang: – Promote FDI, concentrate in

the coastal areas– Restrict mobility so that

movement of people from the West is gradual

– Huge inequality between rural and urban, between east and west

• Hu Jintao: need “harmonious society”– Recent crackdown on

“Shanghai Gang”