Transcript Inequalities, inequalities…..

Global income inequality:
what it is and why
it matters?
Branko Milanovic
Moscow, 9-10 November 2006
Email: [email protected]
1. Inequalities today
Three concepts of inequality defined
Concept 1 inequality
Concept 2 inequality
Concept 3 (global) inequalty
Inequality, 1950-2002:
The mother of all inequality disputes
0.7
Global Inequality
0.6
Gini Index
Concept 2 inequality
0.5
Concept 1 inequality
19
50
19
52
19
54
19
56
19
58
19
60
19
62
19
64
19
66
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
0.4
Year
World unweighted
World population-weighted
World weighted except China
2. 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)
3. First calculations of global
inequality from household survey
data alone
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)
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
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)
102(22)
121(52)
World
122(63) 115(58)
Global inequality
(distribution of persons by $PPP or US$ income per capita)
1988
1993
1998
2002
61.9
(1.8)
65.2
(1.8)
64.2
(1.9)
65.2
(1.6)
77.3
(1.3)
80.1
(1.2)
79.5
(1.4)
80.5
(1.1)
International dollars
Gini
index
US dollars
Gini
index
4. 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)
90
2000
80
1870
70
60
Location
Location
50
40
30
C lass
20
Class
10
0
1870
Based on Bourguignon-Morrisson (2002) and Milanovic (2005)
2000
Share of between-country
inequality in total inequality
Between
country Gini
(PPP dollars)
Share of total
inequality (in %)
Between
country Gini
(US dollars)
Share of of total
inequality (in %)
1988
1993
1998
2002
51.6
54.2
53.1
54.9
83
83
83
84
69.5
71.7
70.8
73.3
89
90
89
91
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.
Four Worlds 1960
Four Worlds 2003
Four worlds in 1960 and 2003
1960
2003
Number of % of
Number of % of
countries population countries population
First
41
26
27
16
Second
22
12
7
2
Third
39
13
29
37
Fourth
25
49
72
46
Growth over 1980-2002 period as function of
initial (1980) income
40
Population according to income of country
where they live (2000): an empty middle
India, Nigeria
20
Percent
30
China
10
Brazil, Russia
WEur, Japan
USA
0
Mexico
0
10000
20000
gdp per capita in ppp
histogram gdpppp [w=popu] if year==2000 & gdpppp<32000 & Dcont==1, bin(20) percent ylabel(0(10)40)
30000
The key borders today
• First to fourth world: Greece vs.
Macedonia and Albania; Spain vs.
Morocco (25km), Malaysia vs. Indonesia
(3km)
• 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)
Year 2002
Approximate % of
foreign workers in
labor force
Year 1960
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)
Malaysia
(Indonesians)
10.0
2.7 to 1
2.6 to 1
>10.0
5.3 to 1
1.5 to 1
5. Global inequality (cont.)
A 90-10 world: fifty-fifty
Cumulative % of Cumulative % of PPP
world population world
income/consumption
5
0.2
10
0.7
25
2.9
50
9.6
75
24.7
90
50.4
Top 10
49.6
Top 5
32.7
In a single
country
(UK)
2.0
25.0
71.5
28.5
18.4
What is a Gini of 64-66; how big is it?
Top
Bottom
Ratio
In $PPP: 5%
33%
0.2%
165-1
10%
50%
0.7%
70-1
In US$: 5%
45%
0.15%
300-1
10%
67.5%
0.45%
150-1
5 countries
31,850
580
55-1
10 countries
28,066
660
42-1
100
First order dominance (year 2002) expressed in
terms of percentile of world income distribution
percentile of world income distribution
20
40
60
80
Germany
Sri Lanka
Russia
Brazil
0
Indonesia
0
5
10
country ventile
15
20
twoway (line inc_c group if contcod=="BRA") (line inc_c group if contcod=="RUS") (line inc_c group if contcod=="DEU") (line inc_c group if contcod=="IDN-R") (line
inc_c group if contcod=="LKA"), legend(off) xtitle(country ventile) ytitle(percentile of world income distribution) text(92 5 "Germany")*/ text(60 14 "Sri Lanka") text(58
4 "Russia") text(44 5 "Brazil")/*
*/ text(35 10 "Indonesia")
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
Poor
Countries
Middle
income
Rich
Total
Poor
3879
210
96
4185
Middle
189
35
52
277
Rich
92
115
707
913
Total
4160
360
855
5375
6. 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.
3500
Transition countries: continued output
divergence despite policy convergence
4
3000
5
st dev. of gdpppp per capita
6
standard deviation of all EBRD indicators
2500
2
2000
3
standard deviation of GDI per capita
1990
1995
2000
Year...
twoway (line EBRD_sd year) (line gdpppp_sd year, yaxis(2)), legend(off) text(6.2 1997 "standard deviation of all
> EBRD indicators") text(3.5 2000 "standard deviation of GDI per capita")
2005
LAC countries: continued output divergence
despite policy convergence
8.00
4
St deviation of the Lora reform indexindicator
7.00
3.9
6.00
3.8
5.00
3.7
4.00
3.6
St. deviation of GDI per capita
3.00
3.5
2.00
3.4
1.00
3.3
0.00
3.2
1985-1988
1988-1991
1992-1994
1995-1997
1998-1999
7. 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)
Income distribution in
poor country
Income distribution in rich
country
B
T
Income
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
• Book “Worlds Apart: Measuring
International and Global Inequality”
• Email: [email protected]
• Website:
http://econ.worldbank.org/projects/inequality