Trends in global income inequality and their political implications

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1 Trends in global income inequality and their political implications LIS Center; Graduate School City University of New York May 2015

2 A. NaEonal inequaliees mostly increased

3 Ginis in the late 1980s and around now A)er 2008 Change Average Gini Pop- weighted Gini GDP- weighted Gini Countries with higher Ginis Countries with lower Ginis From final- complete3.dta and key_variables_calcul2.do (lines 2 and 3; rest from AlltheGinis)

4 Ginis in the late 1980s and around now Gini after CRI CHN ECUDOM BOL SGP NGA USA MYS PER SLV URY CIV ARG UGA GEO MKD ISR KOR MRT TUR RUS IRN IDN PHL THA VEN GBR KGZ LVA BGR PRT JOR LKA ITA IND CAN MDA LTUPOL ESP FRA GRC ROU MLI EST BGD JPN DEU TWN AZE HRV TJK IRL PAK AUS FIN AUT BEL NLD HUNKAZ ARM CZE SVKUKR BLR SWE DNK NOR SVN COL MEX GTM HND PAN CHL BRA Gini between 1985 and 1990 twoway (sca9er bbb aaa if year==2000, mlabel(contcod) msize(vlarge)) (funcfon y=x, range(20 60) legend(off) xftle(gini between 1985 and 1990) yftle(gini a)er 2008)) using allginis.dta

5 Ginis in 1988 and 2008 (populaeon- weighted countries) Gini in CHN-U RUS CHN-R IND-R USA NGA IND-U MEX BRA Gini in 1988 From twenty_years/ key_variables_calcul3.do

6 Convergence of countries Ginis: an empirical observaeon without theoreecal explanaeon BGR HUN POL CZE ECU GTM ARG CHN CHL GBR USA NZL SYC JAM HKG DOM SGP IND ISR VEN PAN PRI COL BELTWN IDN IRN CAN FJI AUS GRC KOR LKA SDN ZMB THA CRI SLV ESP BOL SWENLDPAK IRL MEX JPN BGD PRT BHS DEU FIN NOR ITA DNK EGY BRB MYS PHL TUN FRA TZA TTO TUR SLE NPL average country Giniall before 1980 BRA PER GAB HND twoway (sca9er change_gini gini_pre1980 if nvals==1, mlabel(contcod)) (lfit change_gini gini_pre1980, yline(0, lpa9ern(dash)) yftle(change in Gini a)er 1980) legend(off)) Using Allthe Ginis.dta

7 Market, gross and disposable income Ginis in the US and Germany USA Germany year year Define_variables.do using data_voter_checked.dta

8 Issues raised by growing naeonal inequaliees Social separaesm of the rich Hollowing out of the middle classes Inequality as one of the causes of the global financial crisis PercepFon of inequality outstrips real increase because of globalizaeon, role of social media and poliecal (crony) capitalism (example of Egypt) Hidden assets of the rich

9 Some long- term examples set in the Kuznets framework

10 50.0 Inequality (Gini) in the USA (gross income across households) From ydisrt/us_and_uk.xls

11 Kuznets and Pikedy frames 70 Ginis for England/UK and the United States in a very long run USA England/UK From uk_and_usa.xls 11

12 Contemporary examples of Brazil and China: moving on the descending poreon of the Kuznets curve Brazil China, Gini Gini ln GDP per capita updated Giniall Fitted values ln GDP per capita twoway (scatter Giniall lngdpppp if contcod=="bra", connect(l) ylabel(40(10)60) xtitle( ) ytitle(gini) xtitle(ln GDP per capita)) (qfit Giniall lngdpppp if contcod=="bra", lwidth(thick)) From gdppppreg4.dta twoway (scatter Giniall lngdpppp if contcod=="chn" & year>1960, connect(l) ylabel(40(10)60) xtitle( ) ytitle(gini) xtitle(ln GDP per capita)) (qfit Giniall lngdpppp if contcod=="chn" & year>1960, lwidth(thick)) From gdppppreg4.dta 12

13 B. Between naeonal inequaliees remained very high even if decreasing

14 DistribuEon of people by income of the country where they live: empeness in the middle (year 2013; 2011 PPPs) Percent India, Indonesia China Brazil, Mexico, Russia W.Europe, Japan USA GDP per capita in 2005 PPP From defines.do in interyd

15 Different countries and income classes in global income distribueon in 2008 percentile of world income distribution Russia USA China India Brazil country percentile From calcu08.dta

16 Denmark Mozambique Mali Tanzania Uganda country ventile

17 14 Countries with more than 1% of their populafon in top global percenfle (above $PPP 72,000 per capita in 2008 prices) CYP DEU IRL KOR NLD TWN FRA NOR GBR JPN CAN LUX CHE SGP USA From summary_data.xls

18 C. Global inequality is the product of within- and between- county inequaliees How did it change in the last 60 years?

19 EssenEally, global inequality is determined by three forces What happens to within- country income distribueons? Is there a catching up of poor countries? Are mean incomes of populous & large countries (China, India) growing faster or slower that the rich world?

20 Global and internaeonal inequality aper World War II Gini coefficient Concept 2 Concept 1 Concept 3 Within- naeonal inequaliees year Defines.do using gdppppreg5.dta Concept2: from Bourguignon & Morrisson

21 Concept 2 inequality with 2011 PPPs and without China and India all countries Without China Without India and China year Defines.do using gdppppreg5.dta

22 Non- triviality of the omided countries (Maddison vs. WDI) PopulaEon coverage Africa Asia E.Europe LAC WENAO World

23 Three important technical issues in the measurement of global inequality The ever- changing PPPs in parecular for populous countries like China and India The increasing discrepancy between GDP per capita and HS means, or more importantly consumpeon per capita and HS means Inadequate coverage of top 1% (related also to the previous point)

24 The issue of PPPs

25 The effect of the new PPPs on countries GDP per capita (compared to the US level) SAU ZMB SDN JOR GHA IDN MNG SUR OMN KWT PAK EGY NPLBGD FJI AZE KAZ QAT YEM CIV LAO CPV DZA THA MDG LKA MAC VNMPHLGTM NER BRN MLI MAR HTITCD COG VENRUS GNQ MYS ARE TGO KEN MRT IND MDV LSO BDI SLE UGA KGZ NGAMDA AGONAM BRA GIN CMR SWZ CHN KHM BTNUKR ETH BLR TJK NIC BOL TUNMKD GNB RWA BFA BEN SEN GEO PRY MNE ARM BIH BGR TUR LVA CAF MWI HND SLV BLZECU DOM PER HUN SGP COL MEX URY CHL TTO SRB ZAF LTU EST MUS HRV POL TZA JAM CRIGAB SVK MLT ITA DNKCHE NOR LUX NZL PAN PRT GRCESP FRA FIN TWN BEL DEU SWE IRLUSA MOZ DJI ALB CZE SVN ISR ISL AUT AUS CAN NLD JPN HKG LBR KOR GBR GMB BWA CYP COM gdppc in 2011ppp BHS C:\Branko\worldyd\ppp\2011_icp\define

26 Country The effect of new PPPs GDP per capita increase (in %) GDP per capita increase populafon- weighted (in %) Indonesia Pakistan Russia India China Africa Asia LaEn America Eastern Europe WENAO 3 2

27 Global income inequality using nominal dollars Gini coefficient Concept 1 Concept 2 Concept Year 63 From two_concepts_exrate.do using Global_new5.dta

28 The gap between naeonal accounts and household surveys

29 Both the level and change: Use of GDP per capita gives a lower lever and a faster decrease of global inequality Gini GDPs pc countries in HS sample HS means--countries in HS sample usual Concept year Defines.do based on gdppppreg5.dta

30 How global inequality changes with different definieons of income Step 1 Global inequality Step 2 GDP ppp ConsumpEon Survey mean

31 Step 1 driven by low consumpeon shares in China and India (although on an unweighted base C/GDP decreases with GDP) C/GDP from national accounts in year India China USA GDP per capita in ppp twoway sca9er cons_gdp gdpppp if group==1 & cons_gdp<1.4 [w=totpop], xscale(log) xftle(gdp per capita in ppp) xlabel( ) yftle(share of consumpfon in GDP) Ftle(C/GDP from nafonal accounts in year 2008) using final08,dta

32 Step 2. No clear (weighted) relaeonship between survey capture and NA consumpeon survey mean/consumption from national account in year India China USA GDP per capita in ppp twoway sca9er scale2 gdpppp if group==1 & scale2<1.5 [w=totpop], xscale(log) xftle(gdp per capita in ppp) xlabel( ) yftle(survey mean over NA consumpfon) Ftle(survey mean/consumpfon from nafonal account in year 2008)

33 The issue of top underesemaeon

34 Rising HS/NA gap and top underesemaeon If these two problems are really just one & the same problem. Assign the enere posieve (NA consumpeon HS mean) gap to naeonal top deciles Use Pareto interpolaeon to elongate the distribueon No a priori guarantee that global Gini will increase

35 Gini: accouneng for missing top incomes Surveys only NAC instead of survey mean NAC with Pareto NAC with top- heavy Pareto

36 The results of various adjustments Replacing HS survey mean with private consumpeon from NA reduces Gini by 1 to 2 points ElongaEng such a distribueon (that is, without changing the consumpeon mean) adds less than ½ Gini point But doing the top- heavy adjustment (NA- HS gap ascribed to top 10% only) adds between 5 and 7 Gini points It also almost eliminates the decrease in global Gini between 1988 and 2008

37 How Global Gini in 2008 changes with different adjustments 10 Increase in global Gini with each marginal adjustment Allocate the gap proporeonally along each naeonal income distribueons Allocate the gap proporeonately and add a Pareto elongaeon Allocate the gap to top 10% and add Pareto elongaeon

38 With full adjustment (allocaeon to the top 10% + Pareto) Gini decline almost fully disappears Top- heavy allocaeon of the gap + Pareto adjustment Survey data only

39 D. How has the world changed between the fall of the Berlin Wall and the Great Recession [based on joint work with Christoph Lakner]

40 Real PPP income change (in percent) Real income growth at various perceneles of global income distribueon, (in 2005 PPPs) $PPP2 X China s middle class $PPP4.5 $PPP12 $PPP 110 X US lower middle class PercenFle of global income distribufon From twenty_years\final\summary_data EsEmated at mean- over- mean

41 Real PPP income change (in percent) Real income gains (in $PPP) at different percenfle of global income distribufon World Without China PercenFle of global income distribufon

Quasi non- anonymous GIC: Average growth rate 1988-2008

42 Quasi non- anonymous GIC: Average growth rate for different perceneles of the 1988 global income distribueon

43 Growth incidence curve ( ) esemated at perceneles of the income distribueon mean growth percentile of global income distribution Using my_graphs.do Mean- on- mean

44 DistribuFon of global absolute gains in income, (anonymous) DistribuFon (in percent) of gain From summary_data.xls venfle/percenfle of global income distribufon

45 5000 Annual per capita a)er- tax income in internafonal dollars US 2nd decile Chinese 8th urban decile From summary_data.xls

46 Global income distribueons in 1988 and 2008 density Emerging global middle class between $3 and $ log of annual PPP real income twoway (kdensity logrrinc [w=pop] if logrrinc>2 & bin_year==2008 & keep==1 & mysample==1) (kdensity logrrinc [w=pop] if logrrinc>2 & bin_year==1988 & keep==1 & mysample==1, legend(off) xetle(log of annual PPP real income) yetle(density) text( "1988") text( "2008")) Or using adding_xlabel.do; always using final_complete7.dta

47 Increasing gains for the rich with a widening urban- rural gap Urban and rural China Urban and rural Indonesia urban rural urban rural decile decile From key_variables_calcul2.do

48 E. Issues of jusece and poliecs 1. CiEzenship rent 2. MigraEon 3. Hollowing out of the middle classes

49 Global inequality of opportunity Regressing (log) average incomes of 118 countries perceneles (11,800 data points) against country dummies explains 77% of variability of income perceneles Where you live is the most important determinant of your income; for 97% of people in the world: birth=ciezenship. CiEzenship rent.

50 Is ciezenship a rent? If most of our income is determined by ciezenship, then there is lidle equality of opportunity globally and ciezenship is a rent (unrelated to individual desert, effort) Key issue: Is global equality of opportunity something that we ought to be concerned or not? Does naeonal self- determinaeon dispenses with the need to worry about GEO?

51 The logic of the argument CiEzenship is a morally- arbitrary circumstance, independent of individual effort It can be regarded as a rent (shared by all members of a community) Are ciezenship rents globally acceptable or not? PoliEcal philosophy arguments pro (social contract; staest theory; self- determinaeon) and contra (cosmopolitan approach)

52 The Rawlsian world For Rawls, global opemum distribueon of income is simply a sum of naeonal opemal income distribueons Why Rawlsian world will remain unequal?

53 Global inequality in Real World, Rawlsian World, Convergence World and Shangri- La World (Theil 0; year 2008) Individual incomes within country All equal Mean country incomes Different (as now) All equal 0 30 (all mean incomes equalized; all country Ginis as now) Different (as now) 68 (all country Theils=0; all mean incomes as now) 98

54 Conclusion Working on equalizaeon of within- naeonal inequaliees will not be sufficient to significantly reduce global inequality Faster growth of poorer countries is key and also

55 MigraEon: a different way to reduce global inequality and ciezenship rent A new view of development: Development is increased income for poor people regardless of where they are, in their countries of birth or elsewhere MigraEon and LDC growth thus become the two equivalent instruments for development

56 A migrant point of view: trade- off between country s mean income and its inequality 14 How much is one Gini point change worth in terms of mean country income? Percent of income Decrease in Gini Increase in Gini Ventile From interyd..\venel_vs_country.xls

57 PoliEcal issue: Global vs. naeonal level Our income and employment is increasingly determined by global forces But poliecal decision- making sell takes place at the level of the naeon- state If stagnaeon of income of rich countries middle classes conenues, will they conenue to support globalizaeon? Two dangers: populism and plutocracy To avert both, need for within- naeonal redistribueons: those who lose have to be helped

58 Final conclusion To reduce global inequality: fast growth of poor countries + migraeon To preserve good aspects of globalizaeon: redistribueon within rich countries

59 AddiEonal slides

60 H. Global inequality over the long- run of history

61 Global income inequality, (Source: Bourguignon- Morrisson and Milanovic; 1990 PPPs ) Theil Gini year twoway (sca9er Gini year, c(l) xlabel(1820(40)2020) ylabel(0(20)100) msize(vlarge) clwidth(thick)) (sca9er Theil year, c(l) msize(large) legend(off) text( "Theil") text( "Gini"))

62 Shares of global income received by top 10% and bodom 60% of world populaeon Top 10% (L- M data) Percentage share of global income Top 10% (B- M data) Bodom 60% (B- M data) 10 Bodom 60% (L- M data) Year

63 A non- Marxist world Over the long run, decreasing importance of within- country inequaliees despite some reversal in the last quarter century Increasing importance of between- country inequaliees (but with some hopeful signs in the last five years, before the current crisis), Global division between countries more than between classes

64 ComposiEon of global inequality changed: from being mostly due to class (within- naeonal), today it is mostly due to locaeon (where people live) Theil 0 index (mean log deviation) Location Class Location Class Based on Bourguignon- Morrisson (2002), Maddison data, and Milanovic (2005) From thepast.xls

65 Very high but decreasing importance of locaeon in global inequality 90 Share of the between component in global Theil (0) Between component, in percent B- M data L- M data Year From thepast.xls under c:\history

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