International inequality (Concept 3) Milanovic, “Global inequality and its implications” Lectures 6-9

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

1. 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 (but they affect it differently)

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

Population coverage Africa Asia EEurope LAC WENAO World8792 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) 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)118(61)

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)

Confrontation with other Concept 3 calculations

Global (concept 3) distribution is not well approximated by theoretical lognormal distribution

3. Importance of differences between countries’ mean incomes

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 comparison: Elizabeth’s dilemma Income in 1820 (£ pa) Approx. position in 1820 income distribution Mr. Darcy 10,000Top 0.1% Elizabeth’s family 3000/7~430Top 1% Elizabeth alone 50Median Gain100 to 1 Income in 1999 (£ pc pa) 270,000 57,000 6, to position estimates based on Colquhoun data data from LIS, and for 0.1% from Piketty (Data- central).

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

4. Global inequality (cont.)

A world: fifty-fifty Cumulative % of world population Cumulative % of PPP world income/consumption In a single country (UK) Top Top

What is a Gini of 64-66; how big is it? TopBottomRatio In $PPP: 5%33%0.2% %50%0.7%70-1 In US$: 5%45%0.15% %67.5%0.45% countries31, countries28,

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 percentile of world income distribution country ventile Year 2002

Note… Not even richest people in rural Indonesia intersect with poorest people in Germany Very little overlap between people in Sri Lanka and Germany But this is not true for Brazil and Russia: about a quarter of the population is better off than the poorest decile in Germany Important later for rules re. global transfers

Poor and rich people and countries, 1998 People Countries PoorMiddle income RichTotal Poor Middle Rich Total

5. Globalization, policy convergence and income divergence

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.

6. 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)

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 Agency Tax 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