Worlds Apart

Center for Economic and Policy Research

Fundación Sistema

Washington, April 7 2006

1. Inequality between countries

2. Global inequality (a sketch)

1. Inequality between countries(Concept 1 inequality)

Three concepts of inequality definedConcept 1 inequality

Concept 2 inequality

Concept 3 (global) inequalty

Inequality, 1950-2000:The mother of all inequality disputes

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Year

Gin

i Ind

ex

World unweighted World population-weighted World weighted except China

Global Inequality

Concept 1 inequality

Concept 2 inequality

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)

Different way to look at world growth rates

1960-1980 1980-2000

Unweighted (each country counts the same)

2.9 0.8

Percentage negative 23 33

China 2.7 8.2

India 1.2 3.6

Population-weighted 3.0 3.2

World (plutocratic ROG) 2.6 1.6

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

Assessment

• World income growth slowed down by 1 percentage point per capita p.a.

• Poor and populous countries grew much faster and average (population-weighted) growth rate even increased

• Countries’ growth record became much more diverse—and systematically so…Divergence

Growth over 1980-2002 period as function of initial (1980) income

Growth rate by each decile of countries, 1960-78 and 1978-2000

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

1 2 3 4 5 6 7 8 9 10

Decile (in the initial year, 1960 or 1978)

Ave

rag

e g

row

th r

ate

per

cap

ita

p.a

.

Between 1978 and 2000

Between 1960 and 1978

Deciles formed according to initial (1960 or 1978 income level)

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

The key borders today

• First to fourth world: Greece vs. Macedonia and Albania; Spain vs. Morocco (25km); Singapore vs. Indonesia

• 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)

Approximate % of foreign workers in labor force

Ratio in per capita GDIs (in PPP terms)

Greece (Albanians)

7.5 4 to 1

Spain (Moroccans)

12.0 4.5 to 1

United States (Mexicans)

>10.0 4.3 to 1

Austria (former Yugoslavs)

10.0 2.7 to 1

Malaysia

(Indonesians)

>10.0 5.3 to 1

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

2. Inequality between world citizens today

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 top countries 31,850 580 55-1

10 top countries

28,066 660 42-1

First order dominance (year 1998) expressed in terms of percentile of world income distribution

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4060

8010

0Y

98_c

1 5 9 13 17 20# of distribution groups

France

Kazak

Brazil

Sri Lanka

India-R

twoway (line Y98_c group if year==1998 & contcod=="BRA") (line Y98_c group if year==1998 & contcod=="IDN-R") (line Y98_c group if year==1998 & contcod=="FRA") (line Y98_c group if year==1998 & contcod=="LKA"), legend(off) xtitle(country ventile) ytitle(percentile of world income distribution)

Same income for the top, different incomes for all the others

Hungary

Ukraine

Peru

20

40

60

80

10

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tile

of

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0 5 10 15 20country ventile

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

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)

• Book “Worlds Apart: Measuring International and Global Inequality”

• Email: bmilanovic@worldbank.org

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