Economic inequality

1
Economic inequality

• Refers to disparities in the distribution of
  wealth and income

2
Economic inequality in the world can be measured
in different ways

• within-country inequality
• between-country inequality
• individual-level inequality
• Wolf et al. call this global economic
  inequality"

3
Types of income inequality

• within-country inequality disparities in the
  distribution of income within a country
• between-country inequality disparities in the
  distribution of income between countries
• individual-level or global inequality
  disparities in the distribution of income among
  individuals worldwide

4
There are different income inequality metrics

• Range
• Ratio
• Gini coefficient

5
Range

• Simply the difference between the highest and
  lowest observations of income (or wealth)
• Reveals absolute gaps in income (or wealth)

6
Ratio

• the ratio of the income of 2 different groups,
  generally higher over lower
• compares 2 parts of the income distribution,
  rather than the distribution as a whole
• equality between these parts corresponds to 11,
  while the more unequal the parts, the greater the
  ratio
• can be calculated as "income share" what
  percentage of national income a subpopulation
  accounts for
• e.g., in 2007, the top 10 (decile) accrued 49.7
  of all income in the US, considerably higher than
  10, which would hold in a condition of income
  equality (Saez 2009)

7
Gini coefficient

• a measure of income inequality within a
  population, ranging from 0 for perfect equality
  (where e/o has same income), to 1 for perfect
  inequality (where one person has all the income)
• population can be a country, a region, the world,
  etc.
• can be used to compare populations or to study
  changes in a single population over time
• It is defined as the area between the Lorenz
  Curve and the diagonal, divided by the total
  area under the diagonal

8
Differences in national income inequality by
national Gini coefficients
Ranges from approx. 0.23 (Sweden) to 0.70
(Namibia)
9
Incensed about Inequality

• Martin Wolf, Ch. 20, pp. 183-189 (Excerpted from
  Wolf, Incensed about Inequality, in Why
  Globalization Works, Yale, 2004)

10
Globalization has NOT increased inequality not
global inequality

• Economic liberalization and intl economic
  integration has not increased global inequality
• Global inequality understood as inequality
  among individuals has declined, and so has
  global poverty

11
Still, between-country and within-country
inequality is rising

• Absolute proportional gaps in living standards
  between worlds richest and poorest countries are
  rising
• Inequality within the worlds big countries is
  rising, e.g., the US

12
Income inequality in the US (US Census Bureau
data)
13
In India, two revolutions were critical for
growth since the mid-1970s

• the green revolution increased agricultural
  productivity, with introduction of pesticides,
  high-yield grains and better management during
  1960s 1970s
• economic liberalization beginning in1980s

14
Economic liberalization has led to partial
convergence

• economic liberalization beginning in1980s has had
  greatest impact on China India
• China India have almost 2/5s of world popn
• China has more people than Latin America
  sub-Saharan Africa combined

15
GL, by increasing economic growth, has reduced
inequality and poverty

1. The of people in extreme poverty fell from 1.18
   billion in 1987 to 1.17 bil. in 1999
2. Enormous declines in the of people in extreme
   poverty have occurred in East Asia
3. The of people in extreme poverty fell very
   modestly in south Asia (1990-1999), while it rose
   sharply in eastern Europe and central Asia and
   above all, sub-Saharan Africa
4. The regional incidence of poverty fell
   dramatically in east Asia
5. The regional incidence of poverty also fell
   sharply in south Asia

16
"Globalization, Growth, and Poverty" (World Bank,
2002)

• 73 developing countries were divided into 2
  groups
• more globalized the third that had increased
  ratios of trade to GDP since 1980
• less globalized 2/3s of countries with declining
  in trade/GDP ratios

17
"Globalization, Growth, and Poverty" Findings

• Average per capita income in globalizers (more
  globalized countries) rose by 67 per year
  1980-1997
• Note 75 of globalizer group's combined
  population comes from India and China
• Average per capita income in less globalized rose
  only about 10 in same period

18
"Globalization, Growth, and Poverty"
Implications

• Results challenge idea that GL necessarily makes
  the rich richer, the poor poorer
• (as predicted by dependency theory, for example)
• Success among globalizers did NOT require the
  full-range of so-called neoliberal policies
• But successful countries all share a move towards
  a market economy, in which private property
  rights, free enterprise and competition took the
  place of state ownership, planning and protection

19
Is Globalization Reducing Poverty and Inequality?

• Wade, Ch. 21, pp. 190-196 (Excerpted from Wade,
  Is Globalization Reducing Poverty and
  Inequality?, World Development 324, 2004)

20
Two perspectives on globalization neoliberal
anti-neoliberal

• Neoliberal sees GL as confirmation that open,
  liberalized economies are more prosperous
• Anti-neoliberal claims GLin current neoliberal
  formhas caused in rising world poverty
  inequality

21
Two sets of policy prescriptions

• Neoliberal
• GL ? flattening, leveling of the playing field
• Policy prescription more global economic
  integration (freer trade, more FDI, more capital
  market liberalization)
• Anti-neoliberal
• GL ? spiking inequality
• Policy prescription less global economic
  integration (limits on market forces)

22
GL ? divergence among regions

• Period of accelerated globalization (1980 on)
  shows positive world per capita growth but also a
  wide divergence of economic performance between
  developing regions
• GDP of developing countries as a group
  (population-weighted) grew faster than that of
  high-income countries
• But regional variation within Global South is
  large

23
Regional inequality

• Whats most striking in data is not overall
  growth trends, but the size of gaps
• testimony to the failure of the poorest countries
  to "catch up"

24
World Bank's poverty figures contain a large
margin of error

1. Poverty headcount is very sensitive to the
   precise level of the international poverty lines,
   which change
2. Poverty headcount is also sensitive to the
   reliability of household surveys of income and
   expenditure, which vary in quality
3. China and India, 2 most important countries for
   the overall trend, have PPP-adjusted income
   figures based on even more guesswork, or
   "guesstimates
4. 1990s change in data collection methodology makes
   comparisons over time unreliable

25
Still, it's plausible that the proportion of the
world population in extreme poverty has fallen

• Despite the problems with income figures, we know
  about trends in other variables, which all show
  improvement
• life expectancy
• height
• other nonincome measures

26
Economic inequality poverty?

• World poverty could decline while world
  inequality rises
• Theres lots of disagreement about inequality
• the trends depend on what combination of measures
  and countries we use

27
Prop. 1. World income distribution has become
rapidly more unequal, when incomes are measured
at market exchange rates (vs PPP exchange rates)
and expressed in US dollars

• Purchasing power parity exchange rate is
  calculated to yield absolute purchasing power
  parity
• The PPP adjustment substantially raises the
  relative income of poor countries
• e.g., India's PPP GDP is about 4 times its market
  exchange rate GDP
• The PPP adjustment thus makes world income
  distribution look much more equal than the
  distribution of market exchange-rate incomes

28
Purchasing power parity (PPP)

• To compare economic statistics across countries,
  data must first be converted into a common
  currency
• Unlike conventional exchange rates, PPP exchange
  rates allow this conversion to take account of
  price differences between countries
• Recently, PPP exchange rates have been calculated
  comparing the cost of a common basket of
  commodities in every country
• By eliminating differences in national price
  levels, the method facilitates comparisons of
  real values for income, poverty, inequality and
  expenditure patterns

29
Empirical examples of the results of disparities
in purchasing power

• Countless migrants leave high prestige jobs in
  poor countries in order to make more money in
  less prestigious jobs in wealthy countries,
  sending a portion of their income back home in
  the form of remittances
• Many working and middle class Americans have the
  option to live out their retirement in poorer
  countries, collecting social security payments
  and pensions, which though meager in the US
  context, can go relatively far in a poorer
  country

30
Big Mac Index, July 22, 2010

• Burgernomics is based on the theory of
  purchasing-power parity, the notion that a dollar
  should buy the same amount in all countries
• Thus in the long run, the exchange rate between
  two countries should move towards the rate that
  equalizes the prices of an identical basket of
  goods and services in each country
• Here "basket" McDonald's Big Mac, which is
  produced in about 120 countries
• Big Mac PPP exchange rate that would mean
  hamburgers cost same in US abroad
• Comparing actual exchange rates w/ PPPs
  indicates whether a currency is under- or
  overvalued
• The Economist, http//www.economist.com/markets/b
  igmac/about.cfm

31
Prop. 2. World PPP-income polarization has
increased, with polarization measured as richest
to poorest decile

• Contrast between what top 10 can buy with income
  (concentrated in core countries) and what bottom
  10 (mostly in Africa) can buy
• The polarizing trend is even sharper if you look
  at top 1 and bottom 1

32
Prop. 3. Between-country world PPP income
inequality has increased since at least 1980,
using per capita GDPs, equal country weights
(China Uganda), and Gini coefficient for the
whole distribution

• By weighing countries equally treating each
  country as a unit of observation we can test
  growth theory and the growth impacts of public
  policies, resource endowments, etc.
• e.g., we can arrange countries by the openness of
  their trade policies and see whether more open
  countries have better economic performance

33
Prop. 4. Between-country world PPP-income
inequality has been constant or falling since
around 1980 - with countries weighted by
population

• This is the trend the neoliberal argument
  celebrates, but there are 2 problems
• 1) exclude China, and this measure shows a
  widening 2) exclude India and it's more
  pronounced
• ? Thus, falling income inequality is NOT a
  general feature of the world economy
• China and India have 38 of world population, so
  they shape trends in world poverty
• China's avg PPP income rose from about 1/3 of
  world avg in 1990 to almost ½ in 1998
• There are problems w/PPP measurements in both
  countries b/c they didnt participate in int'l
  price comparisons on which PPP calculations are
  based

34
Prop. 4. (contd)

• There's rising inequality in both countries, esp
  by region
• Ratio of avg income of the richest to poorest
  province in China rose from 3.2 in 91 to 4.8 in
  93, where it remained in 98-2001 Indias was
  4.2, the US 1.9 in the late 90s
• Dispersion in pay rates in manufacturing have
  steadily widened since the early 1980s
• Absolute income gaps are widening fast

35
Globalization, Growth, and Poverty (World Bank
2002)

• Less globalized/more globalized is calculated on
  basis of changes in trade/GDP ratio 1977-97
• trade/GDP ratio is the sum of exports and imports
  divided by the GDP
• Data show that more globalized countries have
  faster economic growth, no increase in
  inequality, and faster reduction of poverty than
  the latter, BUT the classifications are dubious
• Using change in trade/GDP ratio as measure of
  globalization skews the results
• Its possible that more globalized countries are
  less open than many less globalized countries, in
  terms of trade/GDP and size of tariff and
  nontariff barriers
• Many globalizers initially had very low trade/GDP
  ratios and still had relatively low ratios at end
  of period
• To call relatively closed economies more
  globalized and to call countries with much
  higher ratios of trade/GDP and much freer trade
  regimes less globalized is an audacious use of
  language (196)

36
Conclusion Falling inequality is not a
generalized feature of the world economy

• Several studies suggest that world income
  inequality has been rising
• The trend is sharpest when incomes are measured
  at market-exchange rates
• PPP-adjusted incomes, in principle, are more
  relevant to relative economic well-being, but
  market exchange rates are highly relevant to
  state capacity, inter-state power, and the
  dynamics of capitalism
• One combination of inequality measures does find
  that income inequality has been falling PPP
  income per capita weighted by population (Prop.
  4) but exclude China and even this metric shows
  rising inequality
• Absolute income gaps are continuing to widen