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International inequality (Concepts 1 and 2)

International inequality (Concepts 1 and 2). Milanovic, “Global inequality and its implications” Lectures 3-5. Definitions. Three concepts of inequality defined. Concept 1 inequality. Concept 2 inequality. Concept 3 (global) inequalty. Definitions Different types of inequality.

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International inequality (Concepts 1 and 2)

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  1. International inequality (Concepts 1 and 2) Milanovic, “Global inequality and its implications” Lectures 3-5

  2. Definitions

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

  4. DefinitionsDifferent types of inequality

  5. What world inequality are we talking about? Comparison between the three concepts of inequality

  6. Concept 1 inequality, 1950-2002

  7. Inequality between countries coverage: countries and population

  8. About 140 countries included; about 6200 country/year GDPs • almost 100 percent of world population and world GDP (in current dollars) • current countries projected backward (NEW) •  SIMA World Bank data used to get benchmark 1995 $PPP GDP per capita; then these GDP per capita projected backward and forward using countries’ real growth rates (78% of data from WB sources; others mostly from national SYs; some from PennWorld Tables, UN sources)

  9. Inequality, 1950-2002:The mother of all inequality disputes Global Inequality Concept 2 inequality Concept 1 inequality

  10. According to Concept 1, countries' performances have diverged over the last two decades Unweighted inter-national inequality, 1950 to 2000

  11. And it is not only because Africa is falling behind

  12. Regional convergence and divergence(Gini and Theil index) Africa Asia Latin America, Caribbean Eastern Europe and former USSR

  13. WENAO Note: Theil Index is always shown by the lower line. The definition of the Theil entropy index is where yi = income of i-th country, μ=mean income, and n=-sample size.

  14. Concept 1 inequality in historical perspective: Convergence/divergence during different economic regimes

  15. Relationship between Gini and ln GDI per capita, 2002

  16. Convergence and growth theory

  17. Convergence and divergence • Unconditional or σ convergence (original studies by Baumol for OECD countries based on Maddison data). All countries end up with the same steady-state equilibirum level (NCGT). • Slower growth of richer countries as MPK falls and they get closer to technological frontier (technology is freely available to all) • Conditional or β convergence (Barro with human capital only). Growth regressions; based also on endogeneous (“new”) growth theory; each country ends with its own steady-state equilibrium

  18. Endogeneous growth in response increasing returns to scale (no ↓ MPs), monopolistic competition (no free competition), and no free diffusion of technology (all key neoclassical assumptions abandoned), role of policies and institutions important • Noted: Lucas paradox: capital flows from rich to rich countries; mean country incomes diverge • But β convergence compatible with greater dispersal of growth rates and incomes • Often meaningless: if Ethiopia had education level and institutions of the US, it would grow faster than the US! (These factors are concommitant with high income, not independent of it.)

  19. State steady income • Depends on A = initial technology but also resource enbdowment, clisate, institutions etc, g = technological progress, s = savings (investment) rate, n = population or labor growth rate, g = rate of technological progress, δ = depreciation, α = share of labor in total output • In unconditional convergence, all economies the same, β<0 even if no other RHS variable • Or economies differ only if one or more of these parameters differ. Some of the parameters to be included on the RHS. And find out if β is negative then. • But do not forget about A!

  20. Panel approach : heterogeneity of countries • Allow for country-fixed effect (contained in A); large differences in technology (A): variables like institutions, climate etc. which are in countrty fixed effect influence income level (not sufficient to use K, L) • Instrument for A; since A is “kitchen-sink” variable can be instrumented by almost any variable • If both A and g differ, no convergence • If parameter heterogeneity (Pasaran & Binder); no sense to talk about crss-country regressions which constrain the parameters (even in panelds)

  21. The bottom line • σ convergence among rich countries since WW2 and possibly earlier; at least in terms of wage-rates (Williamson), and even during the Inter-war years (Milanovic, Restat) • σ divergence for the world recently, but also historically, since the Industrial revolution • σ or unconditional divergence is the same as increase in Concept 1 inequality (Gini instead of st. deviation of logs) • The world of increasing returns to scale PF is a world of high income and very high inequality (examples of Sylicon valley, soccer)

  22. The two periods, 1960-1978 and 1978-2000

  23. 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”

  24. But also discontinuity in inequality trends Within-country inequalities have been rising during the last two decades (US, UK, China, India) Inequalities between countries are rising since 1978 Population weighted inequality between countries decreasing since 1978 thanks to growth in China and India (Caveat: acc. to Maddison Concept 2 inequality is almost stable) Inequality among people in the world is very high (Gini between 62 and 66) but its direction of change is not clear

  25. 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)

  26. Different way to look at world growth rates

  27. Annual per capita growth rates 1980-2002

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

  29. Distribution of population (in %; year 2000) according to how country did over 1980-2000

  30. The Four Worlds

  31. 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.

  32. The border countries and their GDP per capita levels (in $PPP, 1995 prices)

  33. Overall upward and downward mobility 1960-78 and 1978-2000 1978-2000 1960-78

  34. Four Worlds 1960

  35. Four Worlds 2003

  36. Four worlds in 1960 and 2003

  37. 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%

  38. 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

  39. Why Concept 1 inequality matters • Are poor countries catching up as we would expect from theory? • Are similar policies producing the same effects or not? (Rodrik: convergence of policies, divergence of outcomes). Why? • Migration issues • Countries are not only interchangeable individuals (random assortments of individuals); they are cultures. Divergence in outcomes is elimination of some cultures. Perhaps it’s good, perhaps not.

  40. Transition countries: continued output divergence despite policy convergence 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")

  41. LAC countries: continued output divergence despite policy convergence

  42. The key borders today • First to fourth world: Greece vs. Macedonia and Albania; Spain vs. Morocco (25km) • 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)

  43. The two periods of international growth

  44. Concept 2 inequality, 1950-2000

  45. Moving to Concept 2: its relevance and irrelevance • Once we have Concepts 1 & 3, Concept 2 is redundant. • But we have imperfect grasp of Concept 3 inequality => Concept 2 provides a check on “true” inequality (its lower bound) • We use it to approximate “true” inequality. Think, at the limit, of each individual being a country

  46. Population according to income of country where they live (2000) India, Nigeria China Brazil, Russia Mexico WEur, Japan USA histogram gdpppp [w=popu] if year==2000 & gdpppp<32000 & Dcont==1, bin(20) percent ylabel(0(10)40)

  47. Inequality between population-weighted countries According to Concept 2, there is convergence among countries…

  48. ...or maybe there is not

  49. Alternative Concept 2 calculations • Alternative growth rates for China (official-World Bank, Maddison, Penn World Tables) • Breaking China, India, US, Indonesia and Brazil into states/provinces (but redistribution within nations) • Breaking China into rural and urban parts (Kanbur-Zhang data set) • What PPP to use (Geary-Khamis, EKS, Afriat)

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