Global income inequality: what it is and why it matters?

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Global income inequality: what it is and why it matters?. Branko Milanovic Moscow, 9-10 November 2006. Email: bmilanovic@worldbank.org. 1. Inequalities today. Three concepts of inequality defined. Concept 1 inequality. Concept 2 inequality. Concept 3 (global) inequalty. - PowerPoint PPT Presentation

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  • Global income inequality: what it is and whyit matters?

    Branko MilanovicMoscow, 9-10 November 2006Email: bmilanovic@worldbank.org

  • 1. Inequalities today

  • Three concepts of inequality definedConcept 1 inequalityConcept 2 inequalityConcept 3 (global) inequalty

  • Inequality, 1950-2002:The mother of all inequality disputesGlobal InequalityConcept 1 inequalityConcept 2 inequality

  • 2. Inequality between world citizens today

  • Methodological issuesGDI per capita or HS meanDefinitional difference (H&E, undisbursed profits) andPractical difference (under-surveying of the rich and under-reporting of property Y)Mixing of the two biases both poverty and inequality downMoreover, 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. countriesIssues: self-employed Y, home C, imputation of housing, treatment of publicly provided H&E, use of top coding, under-estimation of property incomesWhat PPP to useEquivalence scales & intra-HH inequality

  • The difficulty stems from contradictory movementsGreater inequality within nationsGreater differences between countries mean incomes (think of US vs. Africa)But catching up of large and poor countriesAll 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 coverageNon-triviality of the omitted countries (Maddison vs. WDI)

  • GDI (US dollar) coverage

  • Number of surveys (C-based)

  • Global inequality(distribution of persons by $PPP or US$ income per capita)

  • 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)18702000Based on Bourguignon-Morrisson (2002) and Milanovic (2005)

  • Share of between-country inequality in total inequality

  • Define four worlds:First World: The West and its offshootsTake 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

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

  • Population according to income of country where they live (2000): an empty middleChinaIndia, NigeriaWEur, JapanUSABrazil, RussiaMexicohistogram gdpppp [w=popu] if year==2000 & gdpppp
  • The key borders todayFirst 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. HungaryIn 1960, the only key borders were Argentina and Uruguay (first) vs. Brazil, Paraguay and Bolivia (third world), and Australia (first) vs. Indonesia (fourth)

  • 5. Global inequality (cont.)

  • A 90-10 world: fifty-fifty

  • What is a Gini of 64-66; how big is it?

  • First order dominance (year 2002) expressed in terms of percentile of world income distributiontwoway (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")

    GermanySri LankaRussiaBrazilIndonesia020406080100percentile of world income distribution05101520country ventile

  • NoteNot even richest people in rural Indonesia intersect with poorest people in Germany Very little overlap between people in Sri Lanka and GermanyBut 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

  • 6. Globalization, policy convergence and income divergence

  • Causal effect of globalization (openness) on global inequalityChannel 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 countriesDepends 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 distributionIn 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 richNo 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.

  • Transition countries: continued output divergence despite policy convergencetwoway (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")

  • LAC countries: continued output divergence despite policy convergence

    Chart1

    7.00122608313.436

    7.17620660073.502

    5.30439760833.488

    6.11963095633.649

    5.70271300983.889

    &A

    Page &P

    St deviation of the Lora reform indexindicator

    St. deviation of GDI per capita

    Sheet1

    Lora Index of Structural Reforms

    1985-19881988-19911992-19941995-19971998-1999

    Argentina3338.259.16061

    Bolivia34.3042.547.867.769.5

    Brazil28.739.846.953.259.5

    Chile50.456.656.658.359.6

    Colombia35.439.353.353.656.1

    Costa Rica37.442.244.653.755.7

    Dominican Republic38.443.844.554.5

    Ecuador31.53546.753.753.2

    Guatemala36.643.946.250.958.1

    Honduras35.449.352.6

    Jamaica43.449.854.456.665.9

    Mexico31.340.649.851.450.6

    Nicaragua57.459.260.8

    Peru3030.552.561.865.1

    Paraguay35.238.555.356.356.5

    El Salvador35.13747.249.156.9

    Trinidad & Tobago51.954.656.963.562.8

    Uruguay35.336.543.845.446.9

    Venezuela27.529.944.249.451.5

    Average36.140.550.454.657.7

    st deviation of reform7.007.185.306.125.70

    ** in percents

    GDI per capita

    in PPP terms

    Mean54135480571860466201

    St deviationn34363502348836493889

    St deviation (1000)3.4363.5023.4883.6493.889

    LAC data from Global_new.dta

    Sheet2

    Sheet3

    Sheet4

    Sheet5

    Sheet6

  • 7. Does Global Inequality Matter?

  • No one in charge of it; there is no global governmentNo one can do much about itNo 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 levelspermit[s] 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.

  • 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 migrationGreater likelihood of conflict (Jennifer Government)

  • We need some rules for global transfersThey 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 implicationsProgressive transfer at the global level and worsening national distributions (may not be politically sustainable)

  • Thus transfers have to satisfyProgressivity 1: reduce mean income differences between rich and poor countriesGlobal progressivity: tax payers should be richer than beneficiariesNational 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 transfersTransfers 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) statesAnd in cash

  • New Global Welfare AgencyTax on commodities consumed by the rich people in rich countriesMoney collected by the AgencyAid in cash given to different poor categories of people in poor countries

  • Several key points: GCBSymmetrical 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 citizensNo fine targeting, but broad categoriesUse NGOs and citizen groups

  • Book Worlds Apart: Measuring International and Global Inequality

    Email: bmilanovic@worldbank.org

    Website: http://econ.worldbank.org/projects/inequality

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