Global Income Inequality by the Numbers: In History and Now

A very good overview of global inequality trends from a historic perspective by Branko Milanovic of World Bank.

The paper presents an overview of calculations of global inequality, recently and over the long-run as well as main controversies and political and philosophical implications of the findings. It focuses in particular on the winners and losers of the most recent episode of globalization, from 1988 to 2008. It suggests that the period might have witnessed the first decline in global inequality between world citizens since the Industrial Revolution. The decline however can be sustained only if countries’ mean incomes continue to converge (as they have been doing during the past ten years) and if internal (within-country) inequalities, which are already high, are kept in check. Mean-income convergence would also reduce the huge “citizenship premium” that is enjoyed today by the citizens of rich countries.

The paper points to three kinds of inequalities:

Inequality 1:  between  nations of the world. It is an inequality statistic calculated across GDPs or mean incomes obtained  from household surveys of all countries in the world, without population-weighting.

Inequality 2: Here population weighing is done. Introducing population is very important. As  we shall see in the next section, during the past 25 years, the movements in Concept 1 and Concept  2 inequalities were very different. Recall, however, that in both cases the calculation takes into  account not actual incomes of individuals, but country averages.

Inequality 3 is the global inequality, which is the most important concept for those interested in the world as composed of individuals, not nations. Unlike the first two concepts, this  one is individual-based: each person, regardless of her country, enters in the calculation with her  actual income.

How about global inequality trends? Over a period, your location of birth seems to have mattered more :

Global inequality can be decomposed into two parts. The first part is due to differences in incomes within nations, which means that that part  of total inequality is due to income differences between rich and poor Americans, rich and poor  Chinese, rich and poor Egyptians and so on for all countries in the world. If one adds up all of  these within-national inequalities, one gets their aggregate contribution to global inequality. This is  what I call the “class” component to global inequality because it accounts for (the sum) of income inequalities between different “income classes” with n countries. The second component, which I  call the “location” component, refers to the differences between mean incomes of all the countries in the world. So there, one actually asks “how much are the gaps in average incomes between England and China, between the Netherlands and India, between the United States and Mexico and so on influencing global inequality?” It is the sum of inter-country differences in mean incomes.In  technical terms the first part – “class” – is also called “within inequality”, the second part – “location”- is called “between inequality”. 

Figure 6 plots these two parts, class and location, for the years 1870 and 2000. Around  1870, class explained more than 2/3 of  global inequality. And now? The proportions have exactly  flipped: more than 2/3 of total inequality is due to location.

Another way to look at things:

The implication of this overwhelming  importance of location, or which is the same, citizenship (i.e., being a member of a rich or poor country), for our lifetime incomes can be also very well captured by another exercise. We divide the  population of each country into 100 income percentiles, ranked from the lowest to the richest. Now,  if we run a regression with income levels of these percentiles (for 120 countries, this gives 12,000  observations) as the dependent variable, and on the other side of the regression, use as the only  explanatory variable the mean income of the country where each percentile comes from, we  explain between more than one-half of variability in individual incomes. This is a remarkable  achievement for a single explanatory variable. Differently put, more than fifty percent of one’s  income depends on the average income of the country where a person lives or was born (the two things being, for 97% of world population, the same). This gives the importance of the location element today.

There are of course other factors that matter for one’s income, from gender and parental education which are, from an individual point of view externally given circumstances, to factors like own education, effort and luck that are not. They all influence our income level. But the  remarkable thing is that a very large chunk of our income will be determined by only one variable,  citizenship, that we, generally, acquire at birth. It is almost the same as saying, that if I know nothing about any given individual in the world, I can, with a reasonably good confidence, predict her income just from the knowledge of her citizenship.

There are three main ways to lower this location inequality – higher growth in developing countries or migration to developed economies or redistributive schemes:

If citizenship explains 50 percent or more of variability in global incomes, then there are three ways in which global inequality can be reduced. Global inequality may be reduced by high growth rates of poor countries. This requires an acceleration of income growth of poor countries, and of course continued high rates of growth of India, China, Indonesia, etc. The second way is to introduce global redistributive schemes although it is very difficult to see how that could happen. Currently, development assistance is a little over 100 billion a year. This is just five times more than the bonus Goldman Sachs paid itself during one crisis year. So we are not really talking about very much money that the rich countries are willing to spend to help poor countries. But the willingness to help poor countries is now, with the ongoing economic crisis in the West, probably reaching its nadir. The third way in which global inequality and poverty can be reduced is through migration. Migration is likely to become one of the key problems—or solutions, depending on one’s viewpoint— of the 21stcentury.

To give just one stark example: if you classify countries, by their  GDP per capita level, into four “worlds”, going from the rich world of advanced nations, with GDPs per capita of over $20,000 per year, to the poorest, fourth, world with incomes under $1,000 per year, there are 7 points in the world where rich and poor countries are geographically closest to each other, whether it is because they share a border, or because the sea distance between them is minimal. You would not be surprised to find out that all these 7 points have mines, boat patrols, walls and fences to prevent free movement of people. The rich world is fencing itself in, or fencing others out. But the pressures of migration are remaining strong, despite the current crisis, simply because the differences in income levels are so huge. 

I conclude with something that resembles a slogan: either poor countries will become richer, or poor people will move to rich countries. Actually, these two developments can be seen as equivalent. Development is about people: either poor people have ways to become richer where they are now, or they can become rich by moving somewhere else. Looked from above, there is no real difference between the two options. From the point of view of real politics, there is a whole world of difference though.

Superb stuff..

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