International inequality (Concepts 1 and 2)

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
DefinitionsDifferent types of inequality
5
What world inequality are we talking about?
Comparison between the three concepts of
inequality
6
Concept 1 inequality, 1950-2002
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, 1950-2005The mother of all
inequality disputes
0.7
Global inequality (Concept 3)
0.6
Weighted international inequalty
Gini coefficient
(Concept 2)
Weighted international
inequality without China
0.5
Unweighted international inequality
(Concept 1)
0.4
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
10
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, µmean
  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 s 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 ß 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 d and ß 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
• ß does not imply d convergence but d convergence
  implies ß 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 ß 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, d depreciation, a share of capital in
  total output. y income per effective unit of
  labor.
• In unconditional convergence, all economies the
  same, ßlt0 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 ß is
  negative then.
• But do not forget about A!

21
Endogenous growth Romers 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

• s 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)
• s divergence for the world recently, but also
  historically, since the Industrial revolution
• s 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 S 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 gt determining global income
  distribution
• T

25
The two periods, 1960-1978 and 1978-2000
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
• Chinas 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
• Africas position deteriorated further
• Developed world pulled ahead
• World growth rate decreased by about 1
  (compared to the 1960-78 period)

29
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
30
Annual per capita growth rates 1980-2002
Mean Median Percentage negative 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 (gt58) 13 90 7 26
Winners 34 7 93 27
Losers 44 3 0 38
Big time losers (gt20) 9 0 0 9
Total 100 100 100 100
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
1978-2000
1960-78
37
Four Worlds in 1960
38
Four Worlds in 2003
39
Four worlds in 1960 and 2003
1960 1960 2003 2003
Number of countries of population 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 its 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(6.2 1997 "standard
deviation of all gt EBRD indicators") text(3.5
2000 "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
Year 2002 Year 1960
Approximate of foreign workers in labor force Ratio of real GDI per capita 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) gt10.0 4.3 to 1 3.6 to 1
Austria (former Yugoslavs) 10.0 2.7 to 1 2.6 to 1
Malaysia (Indonesians) gt14.0 5.3 to 1 1.5 to 1
47
The two periods of international growth
Period 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
48
Concept 2 inequality, 1950-2000
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 gt 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
WEur, Japan
USA
Mexico
histogram gdpppp wpopu if year2000
gdpppplt32000 Dcont1, 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 Chinas 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
regions
0.550
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, 1980-00
1980
2000
twoway (kdensity lngdp wpopu if Dgrand21
year1980 lngdplt11)
59
From one to two poles? Concept 2 inequality in
1955 and 2000
twoway (kdensity lngdp wpopu if Dcont1
year1955 lngdplt11) (kdensity
60
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