worlds apart: measuring international and global inequality

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: bmilanovic@worldbank.org

• Website: http://econ.worldbank.org/projects/inequality