Global income inequality today Branko Milanovic Perugia, June Based on the book Worlds Apart, 2005 and updates BM note: this is an update of moscow2.ppt

1. Inequalities today

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

Inequality, : The mother of all inequality disputes Gini coefficient Weighted international inequality without China Weighted international inequalty (Concept 2) Global inequality (Concept 3) Unweighted international inequality (Concept 1)

Three concepts of inequality using the new 2005 PPPs ( ) Graph in interyd\dofiles\defines.do

The impact of new PPPs Concept 2 inequality increases by almost 10 Gini points (a level shift) Somewhat steeper decline of Concept 2 inequality in the last decade (because India and China now appear poorer) About 5 Gini points increase in Concept 1 inequality (shift effect; no trend effect) About 5 Gini points increase in global inequality

(cont.) World poorer than thought, Asia in particular Inequality (in all formulations) greater Two engines of “global equalization”: China and India

Concept 1 and Concept 2 inequality Graph in interyd\dofiles\defines.do

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 (1) Greater inequality within nations (2) Greater differences between countries’ mean incomes (think of US vs. Africa) (3) But catching up of large and poor countries (China and India) All of these forces determine what happens to GLOBAL INEQUALITY (but they affect it differently)

3. First calculations of global inequality from household survey data alone

Population coverage Africa Asia EEurope LAC WENAO World Non-triviality of the omitted countries (Maddison vs. WDI)

GDI (US dollar) coverage Africa Asia EEurope LAC WENAO World

Number of surveys (C-based) Africa14(11)30(27)24(24)30(29) Asia19(10)26(18)28(20)26(18) EEurope27(0)22(0)27(14)26(16) LAC19(1)20(4)22(2)21(1) WENAO23(0) 21(3)21(2) World102(22)121(52)122(63)124(66)

International dollars ($PPP) Gini index 68.4 (2.0) 70.0 (1.4) 69.4 (1.8) 70.8 (1.4) Between compnt US dollars Gini index 77.8 (1.5) 80.4 (1.4) 79.6 (1.3) 81.0 (1.1) Global inequality (with 2005 PPPs) (distribution of persons by $PPP or US$ income per capita)

4. Importance of the differences in countries’ mean incomes

Concept 1 inequality in historical perspective: Convergence/divergence during different economic regimes

In Gini terms: where Gi=individual country Gini, π=income share, y i = country income, pi = population share, μ=overall mean income, n = number of countries, L=overlap term How are Concepts 2 and 3 related? Concept 2

A non-Marxist world Over the long run, decreasing importance of within-country inequalities despite the reversal in the last quarter century, Increasing importance of between-country inequalities (with some hopeful signs in the last five years, before the current crisis), Global division between countries more than between classes

Composition of global inequality changed: from being mostly due to “class” (within-national), today it is mostly due to “location” (where people live; between-national) Based on Bourguignon-Morrisson (2002) and Milanovic (2005)

A literary illustration: Elizabeth’s dilemma (from Pride and Prejudice) Income in 1810 (£ pa) Approx. position in 1810 income distribution Mr. Darcy 10,000Top 0.1% Elizabeth’s family 3000/7~430Top 1% Elizabeth alone 50Median Gain100 to 1 Income around Y2K (£ pc pa) 270,000 57,000 6, to position estimates based on Colquhoun data. Y2K data from LIS (UK1999), and for 0.1% from Piketty (Data-central).

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 in 1960

Four Worlds in 2003

Growth over period as function of initial (1980) income

Population according to income of country where they live (2007): an empty middle histogram gdpppp [w=popu] if year==2007 & gdpppp<50000 & Dcont==1, bin(20) percent ylabel(0(10)40) xtitle(GDP per capita in 2005 PPP) USA W Europe, Japan Brazil, Russia, Mexico China India, Indon, Bgd

The key borders today First to fourth world: Greece vs. Macedonia and Albania; Spain vs. Morocco (25km), Malaysia vs. Indonesia (3km) First to third world: US vs. Mexico. In 1960, the only key borders were Argentina and Uruguay (first) vs. Brazil, Paraguay and Bolivia (third world), and Australia (first) vs. Indonesia (fourth)

Year 2007Year 1980 Approximate % of foreign workers in labor force Ratio of real GDI per capita Greece (Macedonian/ Albanians) 7.54 to 12.1 to 1 Spain (Moroccans) to 16.5 to 1 United States (Mexicans) 15.6*3.6 to 12.6 to 1 Malaysia (Indonesians) > to 13.6 to 1 * BLS, News Release March 2009; data for 2008 inclusive of undocumented aliens.

5. Global inequality (cont.)

More than fifty-fifty world (new PPPs) Cumulative % of world population Cumulative % of PPP world income/consumption In a single country (UK) Top Top

How big is a Gini of 70? (Year 2002, 2005PPPs) TopBottomRatio In PPP dollars 5 percent38%0.24% percent58%0.6%95-1 In current $ 5 percent45%0.15% percent67.5%0.45% top countries31,

Different countries and income classes in global income distribution (year 2002; new PPPS) Germany USA RussiaBrazil India percentile of world income distribution country percentile

Note… Richest people in India barely intersect with poorest people in Germany Bottom 20% of Americans worse off than equivalent people in Germany But this is not true for Brazil and Russia: about half of the population of Brazil better off than the very poorest percentile in Germany; for Russia, it is 4/5. Russian better-off than Brazilians except at the top (note convexity at the top in Brazil) Important later for rules re. global transfers

Distribution of percentile of global income distribution across five world regions (02 WYD). graph box inc_c if maxgroup==20, over(region); use world2002.dta

Germany Italy Russia Serbia Hungary percentile of world income distribution country ventile

GDP per capita and Gini

Global inequality of opportunity How much of variability of income person’s global income can we explain with two circumstances only: person’s country of citizenship and income class of his/her parents? Both circumstances basically given at birth With citizenship person receives several public goods: income of country, its inequality level, and its intergenerational income mobility.

Base caseOptimisticPessimistic Mean country income ($PPP; in logs) 0.99 (0) 0.99 (0) 0.99 (0) Gini index (0) (0) (0) Parents’ national income class (from 1 to 20) (0) (0) (0) Adj. R Based on 116 countries, 20 ventiles for each, year 2002 The answer is: about 80 percent! (dependent variable: HH per capita income in $PPP ) Base (optimistic, pessimistic) case about intergenerational income mobility in different parts of the world

6. Global financial crisis and global inequality

15 largest annual GDP per capita declines in the United States history

Plutocratic and people’s recessions are not the same thing

Plutocratic and people’s global growth rate in years of plutocratic recessions Plutocratic growth rate People's growth rate

Shrinking GDPs

Who is affected more: poor or rich countries?

The financial crisis : relationship between initial GDP per capita and its change during the crisis

The Great Depression : relationship between initial GDP per capita and its change during the crisis

World, by population, in the crisis 1930 twoway (scatter dlngdpppp laggdpppp if year==1930 [w=pop]) (lowess dlngdpppp laggdp > ppp if year==1930), yline(0) ytitle(growth rate) legend(off) xtitle(GDP per capita > in 1929) [from maddison_polity2.dta

Unweighted correlation coefficient between growth rate and GDI per capita (in years of global recession) Negative coeff: rich countries decline more.

World, by population, in the crisis 1991 twoway (scatter dlngdpppp laggdpppp if year==1991 & dlngdpppp -0.1 [w=pop]) (lowess dlngdpppp laggdpppp if year==1991), yline(0) ytitle(growth rate) legend(off) xtitle(GDP per capita in 1990) [from maddison_polity2.dta]

But after , the Third World took 25 years to recover

Implications First negative effect will be mostly felt by rich people (in particular, those with high financial assets) and rich countries Rates of GDP will decline more in rich countries Then, the crisis will spread wider Difficult to predict next effects: prices of raw materials, dependence on exports, amount of debt Possible replay of the period when growth rate of Third World declined by more than 1 percentage point

6. Globalization and income inequality

Causal effect of globalization (openness) on global inequality Channel 1. Different effect on within-national income distributions (difference between poor and rich countries; HOS and revisions) Channel 2. Different effect on growth rates of poor and rich countries (the openness premium should be higher for poor countries) Channel 3. Different effect on populous and small countries Depends on history: are populous countries rich or poor at a given point in time?

Assume globalization is good for for poor, populous countries, no effect on within-national distribution In the current constellation, India and China grow faster => global inequality ↓ (mean income convergence, lower global inequality) Decouple poor and populous; let China and India be rich No change in individual effects of gloablization; mean convergence continues but global inequality may now go ↑ Conclusion. Even if effects are known and unchanged, the outcome may differ.

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: R/U differences in China and India have global implications) Inequality among people in the world is very high (Gini around 70) 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)

7. 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

Does global inequality matter? NO, 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.”

What may be the effects of global inequality? Globalization increases awareness of differences in living standards (aspiration level changes; empirical studies show it) Leads to migration Greater likelihood of conflict (Jennifer Government)

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)

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)

Book “Worlds Apart: Measuring International and Global Inequality”, Princeton UP, Website:

Extra slides

Between country Gini (PPP dollars) Share of total inequality (in %) Between country Gini (US dollars) Share of of total inequality (in %) Share of between-country inequality in total inequality (05 ICP)

The rich and the poor (equal total income) 57, , , Rich people (in million) Poor people (in millaion) Top US percentile Top US decile Top global 1%

Percentage of global population living in countries with negative growth (in years of global plutocratic recession)