Is the Developing World Catching Up? Global Convergence and National Rising Dispersion Maurizio Bussolo, Rafael E. De Hoyos, and Denis Medvedev The World Bank Paper prepared for the World Bank’s 2008 Economists’ Forum, April 17, Washington, DC

Why global inequality matters? 1.Is globalization increasing global income disparities? 2.Closer international economic relationships has increased global awareness (Milanovic, 2006) No global representative government More awareness creates more demand for redistribution “International policies are decided on the street” (Collier, 2007 “The bottom billion”) Objective: Analyze, ex-ante, the potential trends in global income distribution

Outline 1.Antecedents to global income distribution analysis 2.Methodology: Global Income Distribution Dynamics (GIDD) 3.The global income distribution in Conclusions

Antecedents to global income distribution analysis Inconclusive evidence on recent trends (last 20 years) on global income distribution 1.Divergence “big time” (Pritchett,1997; Quah, 1996) 2.Bourguignon and Morrison (2002): global inequality has not changed in the last 20 years 3.Sala-i-Martin (2006): global inequality has reduced 4.Milanovic (2002): global income distribution deteriorated

Sources behind the discrepancies Data sources, country coverage, time period Different concepts of inequality:

Decomposing Global Distribution Global inequality can be defined as a sum of inequality between countries and inequality within countries The changes in global distribution are also a function of these two components: Convergence Component Dispersion Component

Ex-ante analysis of global inequality This is the first attempt to make an ex-ante analysis of global income distribution Create counterfactual analysis of different policy scenarios (e.g. what if globalization continues?) Our approach takes into account the convergence (between) and dispersion (within) components of global inequality

Methodology: GIDD

Education forecasts Skilled Un- skilled Young6040 Old3070 Skilled Un- skilled Young6040 Old6040 –Demographic dimensions in forecasting: Adding education to age and gender Lutz, Goujon and Dobhammer-Reither (1999) and Lutz and Goujon (2001)

Methodology: GIDD

GIDD: From country-specific to global analysis 1.Global CGE  LINKAGE 2.Global household data Collection of all available household surveys around year 2000 (120 countries covering 91 percent of the world population) Standardise incomes using PPP Standardise linking variables: education and sector of employment

The Global Distribution in 2030 Global income inequality reduces Gini (2000) = 0.68 Gini (2030) = 0.63

Decomposing the inequality levels Subgroup Decomposition YearGiniTheilBetweenWithin (75%)(25%) (70%)(30%)

Rising intra-country inequality What if the only change observed was the within- country changes in inequality?

Demographic and economic shifts and income distribution Change due to demographic shift Total change Variation of Gini coefficient between base year and 2030 Change due to economic shift More equalLess equalTotal change in income inequality

Convergence Component What if the only change observed was the between-country changes growth rates?

Poor Populous Countries are Catching Up Global 2000Global 2030 China 2000China 2030

The Emergence of a Global Middle Class Definition: Individuals whose income is between the per-capita income of Brazil and Italy, i.e. between 10 and 20 dollars a day, 1993 PPP Increase in the global middle class –2000 = 460 million members (8 % of global population) –2030 = 1.2 billion members (14 % of global population) How much is due to China and India? –½ of the total change in the global middle class (GMC) is explained by China

The Importance of China and India in the Global Middle Class

Conclusions 1.GIDD contributes to our understanding of the dynamics behind changes in global distribution 2.We show that the changes in global distribution are the outcome of several off- setting changes The reduction in global inequality depends on the convergence of poor and populous countries (China and India) Inequality within-countries is expected to increase due a rise in the skilled-to-unskilled wage premium

Conclusions 3.The rise in the middle class can provide support for further globalization 4.Specific groups of people within countries may not be able to adjust to the new wave of globalization 5.Governments should be able to design equity enhancing policies to compensate the losers