Worlds Apart: Measuring International and
Global Inequality
1. Inequality today
2. Inequality between world citizens today
3. Does global inequality matter?
4. What is to be done?
Presentations in Europe
Barcelona, Belgrade, Kyiv, London: October-November 2005
Madrid, Graz, Moscow, Prague: October-November 2006
1. Inequality today
Three concepts of inequality definedConcept 1 inequality
Concept 2 inequality
Concept 3 (global) inequalty
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
Focus first on inequality between countries: Discontinuity in development trends around
1978-80• The watershed years (Bairoch)
• Tripling of oil prices
• Increase in real interest rates (from –1% to +5% in the USA and the world)
• Debt crisis
• China’s responsibility system introduced
• Latin American begins its “lost decade”, E. Europe/USSR “stagnate”
The outcome:
• Middle income countries declined (Latin America, EEurope/former USSR)
• China and India pulled ahead
• Africa’s position deteriorated further
• Developed world pulled ahead
• World growth rate decreased by about 1 % (compared to the 1960-78 period)
Annual per capita growth rates 1980-2002Mean Median Percentage
negative
“Old OECD” 1.9 2.0 17
Middle income countries
1.0 1.8 33
LLDC 0.1 0.8 43
Growth over 1980-2002 period as function of initial (1980) income
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.
Four Worlds 1960
Four Worlds 2003
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
Parts of Africa where 2000 GDI per capita is less than in 1980 (350m people )
Poorer than during Carter
US GDI per capita in the meantime increased 50%
Parts of Africa where 2000 GDI per capita is less than in 1963 (180m people )
Poorer than during J.F. Kennedy
US GDI per capita in the meantime doubled
Now look at Concept 2 inequality,population-weighted international inequality
• What do alternative data sources say?
• Breaking large countries into their states or rural/urban areas
• Using alternative GDI per capita data for China
• Expanding sample size to “failed” countries (i.e. using Maddison’s data)
Concept 2 inequality based on different data and partitions
0.45
0.5
0.55
0.6
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Year
World Bank data
Maddison
PWT
With states/prov.
With R/U
Excursus: Historical perspective
Three concepts of inequality in history: Global Gini values, 1820-2000
0
10
20
30
40
50
60
70
1820 1870 1890 1900 1913 1929 1938 1952 1960 1978 2000
0
1000
2000
3000
4000
5000
6000
7000
Concept 3
Concept 2
Concept 1
GDP per capita
Based on Maddison, Bourguignon and Morrisson, and Milanovic
Size and composition of global inequality in 1870 and 2000
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).
A literary comparison: Elizabeth’s dilemma
Income in 1820 (£ pa)
Approx. position in 1820 income distribution
Mr. Darcy
10,000 Top 1%
Elizabeth’s family
3000/7~430 Top 10%
Elizabeth alone
50 Bottom 10%
Gain 100 to 1
Income in 2000 (£ pc pa)
130,000
37,000
2,600
50 to 1
2. Inequality between world citizens today
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?
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
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
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)
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
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)
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)
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
The bottom line
• In PPP terms, the top decile controls one-half of world income.
• In dollar terms, the top decile controls
two-thirds of world income.
twoway (line Y02_c group if contcod=="BRA") (line Y02_c group if contcod=="IDN-R") (line Y02_c group if contcod=="DEU") (line Y02_c group if contcod=="LKA") (line Y02_c group if contcod=="CHN-U"), legend(off) xtitle(country vent> ile) ytitle(percentile of world income distribution) text(90 3 "Germany") text(62 5 "urban China") text(50 6 "Brazi l") text(52 12 "Sri Lanka") text(40 18 "rural India")
Germany
urban China
Brazil Sri Lanka
rural India
02
04
06
08
01
00
pe
rce
ntil
e o
f w
orl
d in
com
e d
istr
ibu
tion
0 5 10 15 20country ventile
Year 2002
Note…
• Not even richest people in rural India intersect with poorest people in Germany
• Almost no intersection between people in Sri Lanka and Germany
• But this is not true for Brazil: about a third of the population is better off than the poorest decile in Germany
• Important later for rules re. global transfers
Conclusion: “The age of inequality”?
Inequalities between countries have increased
Population weighted inequality between countries went down thanks to fast growth in China and India (Caveat: acc. to Maddison it is almost stable + R/U differences in China and India have global implications)
Inequality among people in the world is very high (Gini between 62 and 66) but its direction of change is not clear
Within-country inequalities have increased in many countries including in the largest (US, UK, China, India, Russia)
3. Does Global Inequality Matter?
• No one in “charge” of it; there is no global government
• No one can do much about it
• No global taxation authority
Why it might matter?
• Globalization increases awareness of differences in living standards
• Leads to migration
• At country level, inequality linked with conflict
• At world level, likely to lead to conflict too (Jennifer Government)
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
• What is the correct utility function?• Is it simply: Ui=fct(Xi) where X is a
vector of consumption?• Or is it U=fct(Xi, Xi/Xmean) where
relative consumption matters too? • If the latter, then with globalization the
relevant (mean or median) consumption increases as people get to know more about each other
• Then even if Xi increases, one’s relative income (Xi/X) may go down and people may be unhappy.
Simply: Ui=fct(Xi)?
• YES, 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.”
• 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.”
Feedback effect of globalization on perception of inequality
• With globalization the relevant (mean or median) consumption may increase as people get to know more about each other
• Hypothesis: The process itself influences the perception (differentiate between the objective reality and its perception)
4. What can be Done?
Possible changes in global rules of the game
• Stanley Fischer: “The international trading system is biased against the poor countries”
• Removal of agro subsidies; free trade in textiles, steel (sensitive products) etc
• Change in WTO rules: less emphasis on intellectual property rights, financial liberalization
• But how about global transfers (something akin to a global safety net)?
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.
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
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)
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…
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
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
• Book “Worlds Apart: Measuring International and Global Inequality”
• Email: [email protected]
• Website: http://econ.worldbank.org/projects/inequality
