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

2. Definitions

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

4. Definitions Different types of inequality

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

6. Concept 1 inequality,

7. Inequality between countries coverage: countries and population

8. 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)

9. Inequality, 1950-2005: The mother of all inequality disputes
0.7
Global inequality (Concept 3)
0.6
Gini coefficient
Weighted international inequalty
(Concept 2)
Weighted international
inequality without China
0.5
Unweighted international inequality
(Concept 1)
0.4
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004

10. Unweighted inter-national inequality, 1950 to 2000
According to Concept 1, countries' performances have diverged over the last two decades
Unweighted inter-national inequality, 1950 to 2000

11. And it is not only because Africa is falling behind

12. Regional convergence and divergence (Gini and Theil index)
Africa
Asia
Latin America, Caribbean
Eastern Europe and former USSR

13. WENAO
Note: Theil Index is always shown by the lower line. The definition of the Theil entropy index is where yi = income of i-th country, μ=mean income, and n=-sample size.

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

15. Relationship between Gini and ln GDI per capita, 2002

16. Convergence and growth theory

17. 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 on the RHS instead of K and L). Growth regressions; based also on endogeneous (“new”) growth theory; each country ends with its own steady-state equilibrium

18. Relationship between δ and β convergence
Sigma (or any other inequality measure) convergence: direct judgment about dispersal of income levels
Beta convergence: indirect (regression-based) regularity; thus not very useful except that it allows us to retrieve a structural parameter in a growth model
β does not imply δ convergence; but δ convergence implies β convergence (Wodon and Yitzhaki 2006 Economic Letters).

19. Endogeneous growth in response to 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.)

20. State steady income
Depends on A = initial technology but also resource endowment, climate, institutions etc, g = rate of technological progress, s = savings (investment) rate, n = population or labor growth rate, δ = depreciation, α = share of capital in total output. y* = income per effective unit of labor.
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!

21. Endogenous growth: Romer’s key points
Technological change propels growth
Technological change endogenous (responds to incentives)
Technological change (knowledge) is a non-rival but partially excludable good (non-rival: can be used by many; excludable: you can exclude some people from using it)
Excludability (intellectual property rights) is crucial to cover fixed costs of research and leads to increasing economies of scale (and hence to divergence in incomes)
(Romer: The origins of endogenous growth, JEP, 1994)

22. 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 country fixed effect influence income level (not sufficient to use K, L)
Instrument for A; since A is “kitchen-sink” variable, it 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 cross-country regressions which constrain the parameters (even in panels)

23. 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 years (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)
The world of increasing returns to scale PF is a world of high income and very high inequality (examples of Sylicon valley, soccer)

24. Link between HOS trade, growth convergence and global income distribution
Factor price equalization theory depends on openness (not necessarily trade); HOS affects factor prices
Under full openness, factor prices will be equal across countries
Yet per capita incomes may differ, since per capita income = Σ wi (factor prices) where weights (w) depend on factor endowments which are not equal across countries
So trade may affect within-national distributions, and growth rates of poor and rich countries => determining global income distribution T

25. The two periods, and

26. Focus first on 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”

27. But also discontinuity in inequality trends
Within-country inequalities have been rising during the last two decades (US, UK, China, India)
Inequalities between countries are rising since 1978
Population weighted inequality between countries decreasing since 1978 thanks to growth in China and India (Caveat: acc. to Maddison Concept 2 inequality is almost stable)
Inequality among people in the world is very high (Gini between 62 and 66) but its direction of change is not clear

28. 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 period)

29. Different way to look at world growth rates
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

30. 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

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

32. 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

33. The Four Worlds

34. 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.

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

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

37. Four Worlds in 1960

38. Four Worlds in 2003

39. 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

40. 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%

41. 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

42. 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.

43. Transition countries: continued output divergence despite policy convergence
twoway (line EBRD_sd year) (line gdpppp_sd year, yaxis(2)), legend(off) text( "standard deviation of all
> EBRD indicators") text( "standard deviation of GDI per capita")

44. LAC countries: continued output divergence despite policy convergence

45. The key borders today
First to fourth world: Greece vs. Macedonia and Albania; Spain vs. Morocco (25km)
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)

46. Ratio of real GDI per capita
Year 2002
Year 1960
Approximate % of foreign workers in labor force
Ratio of real GDI per capita
Greece (Albanians)
7.5
4 to 1
2.2 to 1
Spain (Moroccans)
12.0
4.5 to 1
2.3 to 1
United States (Mexicans)
>10.0
4.3 to 1
3.6 to 1
Austria (former Yugoslavs)
10.0
2.7 to 1
2.6 to 1
Malaysia
(Indonesians)
>14.0
5.3 to 1
1.5 to 1

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

48. Concept 2 inequality,

49. 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

50. Population according to income of country where they live (2000)
India, Nigeria
China
Brazil, Russia
Mexico
WEur, Japan
USA
histogram gdpppp [w=popu] if year==2000 & gdpppp<32000 & Dcont==1, bin(20) percent ylabel(0(10)40)

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

52. ...or maybe there is not

53. 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)

54. 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

55. Concept 2 inequality based on different data and partitions
0.600
WB with regions and
China rural/urban
WB data with
0.550
regions
Maddison
0.500
World Bank
PWT6.1
0.450
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001

56. Concept 2 inequality based on different data and partitions

57. How much has Concept 2 inequality changed (Gini points; 1985-2000)?

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

59. 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

60. Concept 2 between 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