Worlds Apart: Measuring International and Global Inequality

Presentations in Europe Barcelona, Belgrade, Kyiv, London: October-November 2005 Madrid, Graz, Moscow, Prague: October-November 2006 1. Inequality today 2. Inequality between world citizens today 3. Does global inequality matter?

4. What is to be done?

1. Inequality today

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

Inequality, 1950-2002:

0.7

The mother of all inequality disputes Global Inequality

0.6

Concept 2 inequality

0.5

Concept 1 inequality

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 Year World unweighted World population-weighted World weighted except China

• 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”

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 1960-78 period)

Annual per capita growth rates 1980-2002

Mean Median Percentage negative “Old OECD” 1.9

2.0

17 Middle income countries LLDC 1.0

0.1

1.8

0.8

33 43

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

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

First

Four worlds in 1960 and 2003

1960 2003 Number of countries % of population Number of countries % of population 41 26 27 16 Second Third Fourth 22 39 25 12 13 49 7 29 72 2 37 46

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%

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

Now look at Concept 2 inequality, population-weighted 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 Maddison’s data)

Concept 2 inequality based on different data and partitions

0.6

0.55

0.5

World Bank data With R/U With states/prov.

Maddison PWT

0.45

19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 Year 19 95 19 96 19 97 19 98 19 99 20 00 20 01

Excursus: Historical perspective

Three concepts of inequality in history: Global Gini values, 1820-2000 70 60 50 40 Concept 3 Concept 1 7000 6000 Concept 2 5000 4000 30 20 3000 2000 GDP per capita 10 1000 0 1820 1870 1890 1900 1913 Based on Maddison, Bourguignon and Morrisson, and Milanovic 1929 1938 1952 1960 1978 2000 0

Size and composition of global inequality in 1870 and 2000

90

2000

80

1870

70 Location 60 Location 50 40 30 20 C lass 10 0 1870 Based on Bourguignon-Morrisson (2002) and Milanovic (2005).

Class 2000

A literary comparison: Elizabeth’s dilemma

Income in 1820 ( £ pa) Mr. Darcy Elizabeth’s family 10,000 3000/7~430 Approx. position in 1820 income distribution Top 1% Top 10% Income in 2000 ( £ pc pa) 130,000 37,000 Elizabeth alone 50 Gain 100 to 1 Bottom 10% 2,600 50 to 1

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

Population coverage

Africa Asia EEurope LAC WENAO World 1988 48 93 99 87 92 87 1993 76 95 95 92 95 92 1998 67 94 100 93 97 92 Non-triviality of the omitted countries (Maddison vs. WDI) 2002 63 95 99 96 99 92

GDI (US dollar) coverage

Africa Asia EEurope LAC WENAO World 1988 49 94 99 90 99 96 1993 85 93 96 93 96 95 1998 71 96 100 95 96 96 2002 59 95 99 95 99 97

Number of surveys (C-based)

Africa Asia EEurope LAC WENAO World 1988 14(11) 19(10) 27(0) 19(1) 23(0) 102(22) 1993 30(27) 26(18) 22(0) 20(4) 23(0) 121(52) 1998 24(24) 28(20) 27(14) 2002 23(23) 24(16) 27(16) 22(2) 21(3) 21(1) 20(2) 122(63) 115(58)

Global inequality

(distribution of persons by $PPP or US$ income per capita) 1998 1988 International dollars 1993 Gini index US dollars Gini index

61.9

(1.8) 77.3

(1.3)

65.2

(1.8) 80.1

(1.2)

64.2

(1.9) 79.5

(1.4) 2002

65.2

(1.6) 80.5

(1.1)

A 90-10 world: fifty-fifty

Cumulative % of world population Cumulative % of PPP world income/consumption 5 10 0.2

0.7

25 50 75

90 Top 10

Top 5 2.9

9.6

24.7

50.4

49.6

32.7

In a single country (UK) 2.0

25.0

71.5

28.5

18.4

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.

Year 2002 Germany urban China Brazil Sri Lanka rural India 0 5 10 country ventile 15 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 vent> 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") 20

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

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

3. 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

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

)

Greece (Albanians) Spain (Moroccans) United States (Mexicans) Austria (former Yugoslavs) Malaysia (Indonesians) Approximate % of foreign workers in labor force 7.5

12.0

>10.0

10.0

>10.0

Year 2002 Year 1960 Ratio of real GDI per capita 4 to 1 4.5 to 1 4.3 to 1 2.7 to 1 2.2 to 1 2.3 to 1 3.6 to 1 2.6 to 1 5.3 to 1 1.5 to 1

•

What is the correct utility function?

• Is it simply: Ui=fct(Xi) where X is a vector of consumption?

• Or is it U=fct(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, one’s relative income (Xi/X) may go down and people may be unhappy.

Simply: Ui=fct(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.”

• 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.”

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)

4. What can be Done?

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

)?

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 B T Income distribution in rich country 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