International inequality (Concepts 1 and 2) Milanovic, “Global inequality and its implications” Lectures 3-5

Definitions

Three concepts of inequality defined Concept 1 inequality Concept 2 inequality Concept 3 (global) inequalty

Definitions Different types of inequality

What world inequality are we talking about? Comparison between the three concepts of inequality

Concept 1 inequality, 1950-2000

Inequality between countries   Coverage: number of countries and share of world population

About 140 countries included; about 6200 country/year GDPs almost 100 percent of world population and world GDP (in current dollars) current countries projected backward (NEW)  SIMA World Bank data used to get benchmark 1995 $PPP GDP per capita; then these GDP per capita projected backward and forward using countries’ real growth rates (78% of data from WB sources; others mostly from national SYs; some from PennWorld Tables, UN sources)

Convergence and divergence Unconditional or σ convergence (original studies by Baumol for OECD countries based on Maddison data). All countries end up with the same steady-state equilibirum level (NCGT). Slower growth of richer countries as MPK falls and they get closer to technological frontier (technology is freely available to all) Conditional or β convergence (Barro with human capital only). Growth regressions; based also on endogeneous (“new”) growth theory; each country ends with its own steady-state equilibrium

Endogeneous growth in response increasing returns to scale (no ↓ MPs), monopolistic competition (no free competition), and no free diffusion of technology (all key neoclassical assumptions abandoned), role of policies and institutions important Noted: Lucas paradox: capital flows from rich to rich countries; mean country incomes diverge But β convergence compatible with greater dispersal of growth rates and incomes Often meaningless: if Ethiopia had education level and institutions of the US, it would grow faster than the US! (These factors are concommitant with high income, not independent of it.)

State steady level of income Depends on A = initial technology but also resource enbdowment, clisate, institutions etc, g = technological progress, s = savings (investment) rate, n = population or labor growth rate, g = rate of technological progress, δ = depreciation, α = share of labor in total output In unconditional convergence, all economies the same, β<0 even if no other RHS variable Or economies differ only if one or more of these parameters differ. Some of the parameters to be included on the RHS. And find out if β is negative then. But do not forget about A!

Panel approach : heterogeneity of countries Allow for country-fixed effect (contained in A); large differences in technology (A): variables like institutions, climate etc. which are in countrty fixed effect influence income level (not sufficient to use K, L) Instrument for A; since A is “kitchen-sink” variable can be instrumented by almost any variable If both A and g differ, no convergence If parameter heterogeneity (Pasaran & Binder); no sense to talk about crss-country regressions which constrain the parameters (even in panelds)

The bottom line σ convergence among rich countries since WW2 and possibly earlier; at least in terms of wage-rates (Williamson), and even during the Inter-war yesrs (Milanovic, Restat) σ divergence for the world recently, but also historically, since the Industrial revolution σ or unconditional divergence is the same as increase in Concept 1 inequality (Gini instead of st. deviation of logs)

Going back to the 1978-2000 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 2.6 1.6

Annual per capita growth rates 1980-2002 Mean 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

Distribution of population (in %; year 2000) according to how country did over 1980-2000 Africa Asia WENAO LLDC Big time winners (>58%) 13 90 7 26 Winners 34 93 27 Losers 44 3 38 Big time losers (>20%) 9 Total 100

The Four Worlds

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.

The border countries and their GDP per capita levels (in $PPP, 1995 prices)

Overall upward and downward mobility 1960-78 and 1978-2000

Four Worlds 1960

Four Worlds 2003

Four worlds in 1960 and 2003 1960 2003 First 41 26 27 16 Second 22 12 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

Poorer than during Carter Parts of Africa where 2000 GDI per capita is less than in 1980 (350m people ) US GDI per capita in the meantime increased 50%

Poorer than during J.F. Kennedy Parts of Africa where 2000 GDI per capita is less than in 1963 (180m people ) US GDI per capita in the meantime doubled

Why Concept 1 inequality matters Are poor countries catching up as we would expect from theory? Are similar policies producing the same effects or not? (Rodrik: convergence of policies, divergence of outcomes). Why? Migration issues Countries are not only interchangeable individuals (random assortments of individuals); they are cultures. Divergence in outcomes is elimination of some cultures. Perhaps it’s good, perhaps not.

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")

LAC countries: continued output divergence despite policy convergence

The two periods of international growth Mean (unweighted) incomes: “Rest against West” Regional homogeneity 1960-1978 Rest catching up Strong divergence in Asia & Africa; divergence in EEurope/FSU; mild convergence in WENAO and LAC 1978-2000 All falling behind except Asia Continued strong divergence in Africa, joined by EEurope; mild divergence in Asia & LAC; continued convergence in WENAO only

Concept 2 inequality, 1950-2000

Moving to Concept 2: its relevance and irrelevance Once we have Concepts 1 & 3, Concept 2 is redundant. But we have imperfect grasp of Concept 3 inequality => Concept 2 provides a check on “true” inequality (its lower bound) We use it to approximate “true” inequality. Think, at the limit, of each individual being a country

The mother of all inequality disputes

How are Concepts 2 and 3 related? In Gini terms: where Gi=individual country Gini, π=income share, yi = country income, pi = popul. share, μ=overall mean income, n = number of countries In Theil:

Inequality between population-weighted countries According to Concept 2, there is convergence among countries…

...or maybe there is not

Alternative Concept 2 calculations Alternative growth rates for China (official-World Bank, Maddison, Penn World Tables) Breaking China, India, US, Indonesia and Brazil into states/provinces (but redistribution within nations) Breaking China into rural and urban parts (Kanbur-Zhang data set) What PPP to use (Geary-Khamis, EKS, Afriat)

Implied China’s GDP per capita in different years According to different sources PWT 6.1 Maddison World Bank 1952 568 627 262 1960 662 785 497 1966 773 879 534 1978 899 1142 754 1988 1703 2119 1676 1999 3319 3803 3867 2000 3642 na 4144

Concept 2 inequality for different versions of China’s GDP per capita

…and breaking China and India into their provinces/states …and breaking China and India into their provinces/states. Inter-national population-weighted inequality: with China and India replaced by their provinces and states  

How much has Concept 2 inequality changed (Gini points; 1985-00)?

Distribution of people according to income of country where they live (ln GDPPPP pc; countries/provinces/states/R-U China, 1980-00 1980 2000 twoway (kdensity lngdp [w=popu] if Dgrand2==1 & year==1980 & lngdp<11)

Distribution of people according to income of country where they live (GDPPPP pc; countries only 1980-2000

From one to two poles? Concept 2 inequality in 1955 and 2000 twoway (kdensity lngdp [w=popu] if Dcont==1 & year==1955 & lngdp<11) (kdensity

Concept 2 between 1980 and 2000 Contributes to decline (equilibrating factors) Inclusion of provinces/states of China, India, Brazil, Indonesia, US (even if many within themselves are diverging!) 0.5 point Reverses decline (disequilibrating factors) Higher (old) income level in China (Maddison) 1.5 points Inclusion of rural/urban break up of China 0.5 points Result: we shave off half of the Concept 2 decline