Worlds Apart: Measuring International and Global Inequality

1
Worlds Apart Measuring International and Global
Inequality
Presentations in Europe Barcelona, Belgrade,
Kyiv, London October-November 2005 Madrid, Graz,
Moscow, Prague October-November 2006

• Inequality today
• Inequality between world citizens today
• 3. Does global inequality matter?
• 4. What is to be done?

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1. Inequality today
3
Three concepts of inequality defined
Concept 1 inequality
Concept 2 inequality
Concept 3 (global) inequalty
4
Inequality, 1950-2002The mother of all
inequality disputes
Global Inequality
Concept 2 inequality
Concept 1 inequality
5
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

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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)

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

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Four Worlds 1960
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Four Worlds 2003
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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
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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
14
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
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Now look at Concept 2 inequality,population-weigh
ted international inequality

• What do alternative data sources say?
• Breaking large countries into their states or
  rural/urban areas
• Using alternative GDI per capita data for China
• Expanding sample size to failed countries (i.e.
  using Maddisons data)

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Concept 2 inequality based on different data and
partitions
With R/U
With states/prov.
World Bank data
Maddison
PWT
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Excursus Historical perspective
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Three concepts of inequality in history Global
Gini values, 1820-2000
Concept 3
Concept 1
Concept 2
GDP per capita
Based on Maddison, Bourguignon and Morrisson, and
Milanovic
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Size and composition of global inequality in 1870
and 2000
2000
1870
Based on Bourguignon-Morrisson (2002) and
Milanovic (2005).
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A literary comparison Elizabeths dilemma
Income in 1820 ( pa) Approx. position in 1820 income distribution
Mr. Darcy 10,000 Top 1
Elizabeths family 3000/7430 Top 10
Elizabeth alone 50 Bottom 10
Gain 100 to 1
Income in 2000 ( pc pa)
130,000
37,000
2,600
50 to 1
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2. Inequality between world citizens today
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Methodological issues

• GDI per capita or HS mean
• Definitional difference (HE, 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?

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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 HE, use
  of top coding, under-estimation of property
  incomes
• What PPP to use
• Equivalence scales intra-HH inequality

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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

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Population coverage
1988 1993 1998 2002
Africa 48 76 67 63
Asia 93 95 94 95
EEurope 99 95 100 99
LAC 87 92 93 96
WENAO 92 95 97 99
World 87 92 92 92
Non-triviality of the omitted countries (Maddison
vs. WDI)
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GDI (US dollar) coverage
1988 1993 1998 2002
Africa 49 85 71 59
Asia 94 93 96 95
EEurope 99 96 100 99
LAC 90 93 95 95
WENAO 99 96 96 99
World 96 95 96 97
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Number of surveys (C-based)
1988 1993 1998 2002
Africa 14(11) 30(27) 24(24) 23(23)
Asia 19(10) 26(18) 28(20) 24(16)
EEurope 27(0) 22(0) 27(14) 27(16)
LAC 19(1) 20(4) 22(2) 21(1)
WENAO 23(0) 23(0) 21(3) 20(2)
World 102(22) 121(52) 122(63) 115(58)
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Global inequality
(distribution of persons by PPP or US income
per capita)
1988 1993 1998 2002
International dollars International dollars International dollars International dollars International dollars
Gini index 61.9 (1.8) 65.2 (1.8) 64.2 (1.9) 65.2 (1.6)
US dollars US dollars US dollars US dollars US dollars
Gini index 77.3 (1.3) 80.1 (1.2) 79.5 (1.4) 80.5 (1.1)
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A 90-10 world fifty-fifty
Cumulative of world population Cumulative of PPP world income/consumption In a single country (UK)
5 0.2
10 0.7 2.0
25 2.9
50 9.6 25.0
75 24.7
90 50.4 71.5
Top 10 49.6 28.5
Top 5 32.7 18.4
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The bottom line

• In PPP terms, the top decile controls one-half of
  world income.
• In dollar terms, the top decile controls
  two-thirds of world income.

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Year 2002
100
Germany
80
urban China
60
Sri Lanka
Brazil
percentile of world income distribution
rural India
40
20
0
0
5
10
15
20
country ventile
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
ventgt 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")
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Note

• Not even richest people in rural India intersect
  with poorest people in Germany
• Almost no intersection between people in Sri
  Lanka and Germany
• But this is not true for Brazil about a third of
  the population is better off than the poorest
  decile in Germany
• Important later for rules re. global transfers

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Conclusion The age of inequality?
Within-country inequalities have increased in
many countries including in the largest (US, UK,
China, India, Russia)
Inequalities between countries have increased
Population weighted inequality between countries
went down thanks to fast growth in China and
India (Caveat acc. to Maddison it is almost
stable R/U differences in China and India have
global implications)
Inequality among people in the world is very high
(Gini between 62 and 66) but its direction of
change is not clear
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3. Does Global Inequality Matter?
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• No one in charge of it there is no global
  government
• No one can do much about it
• No global taxation authority

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Why it might matter?

• Globalization increases awareness of differences
  in living standards
• Leads to migration
• At country level, inequality linked with conflict
• At world level, likely to lead to conflict too
  (Jennifer Government)

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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) gt10.0 5.3 to 1 1.5 to 1
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• What is the correct utility function?
• Is it simply Uifct(Xi) where X is a vector of
  consumption?
• Or is it Ufct(Xi, Xi/Xmean) where relative
  consumption matters too?
• If the latter, then with globalization the
  relevant (mean or median) consumption increases
  as people get to know more about each other
• Then even if Xi increases, ones relative income
  (Xi/X) may go down and people may be unhappy.

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Simply Uifct(Xi)?

• YES, 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.

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• YES, according to Kuznets (1954)
• reduction of physical misery associated with
  low income and consumption levelspermits an
  increaseof political tensions
• BECAUSE
• the political misery of the poor, the tension
  created by the observation of the much greater
  wealth of other communitiesmay have only
  increased.

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Feedback effect of globalization on perception of
inequality

• With globalization the relevant (mean or median)
  consumption may increase as people get to know
  more about each other
• Hypothesis The process itself influences the
  perception (differentiate between the objective
  reality and its perception)

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4. What can be Done?
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Possible changes in global rules of the game

• Stanley Fischer The international trading
  system is biased against the poor countries
• Removal of agro subsidies free trade in
  textiles, steel (sensitive products) etc
• Change in WTO rules less emphasis on
  intellectual property rights, financial
  liberalization
• But how about global transfers (something akin to
  a global safety net)?

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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.

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In addition transfers have national income
inequality implications
Progressive transfer at the global level and
worsening national distributions (may not be
politically sustainable)
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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)

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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
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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
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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

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• Book Worlds Apart Measuring International and
  Global Inequality
• Email bmilanovic_at_worldbank.org
• Website http//econ.worldbank.org/projects/inequa
  lity