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

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.

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

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  1. Global income inequality: what it is and whyit matters? Branko Milanovic Moscow, 9-10 November 2006 Email: bmilanovic@worldbank.org

  2. 1. Inequalities today

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

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

  5. 2. Inequality between world citizens today

  6. 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?

  7. 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

  8. 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 (but they affect it differently)

  9. 3. First calculations of global inequality from household survey data alone

  10. Population coverage Non-triviality of the omitted countries (Maddison vs. WDI)

  11. GDI (US dollar) coverage

  12. Number of surveys (C-based)

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

  14. 4. Importance of differences between countries’ mean incomes

  15. 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) 2000 1870 Based on Bourguignon-Morrisson (2002) and Milanovic (2005)

  16. Share of between-country inequality in total inequality

  17. 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.

  18. Four Worlds 1960

  19. Four Worlds 2003

  20. Four worlds in 1960 and 2003

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

  22. Population according to income of country where they live (2000): an empty middle 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)

  23. The key borders today • First 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. 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)

  24. 5. Global inequality (cont.)

  25. A 90-10 world: fifty-fifty

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

  27. First order dominance (year 2002) expressed in terms of percentile of world income distribution 100 Germany 80 Sri Lanka 60 Russia percentile of world income distribution Brazil 40 Indonesia 20 0 0 5 10 15 20 country ventile twoway (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")

  28. Note… • Not even richest people in rural Indonesia intersect with poorest people in Germany • Very little overlap between people in Sri Lanka and Germany • But 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

  29. Poor and rich people and countries, 1998

  30. 6. Globalization, policy convergence and income divergence

  31. Causal effect of globalization (openness) on global inequality • Channel 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 countries • Depends on history: are populous countries rich or poor at a given point in time?

  32. Assume globalization is good for for poor, populous countries, no effect on within-national distribution • In 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 rich • No 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.

  33. 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")

  34. LAC countries: continued output divergence despite policy convergence

  35. 7. Does Global Inequality Matter?

  36. No one in “charge” of it; there is no global government • No one can do much about it • No global taxation authority

  37. 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.”

  38. 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 politicalmisery of the poor, the tension created by the observation of the much greater wealth of other communities…may have only increased.”

  39. 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 migration • Greater likelihood of conflict (Jennifer Government)

  40. 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 personto a poorer person.

  41. In addition transfers have national income inequality implications Progressive transfer at the global level and worsening national distributions (may not be politically sustainable)

  42. 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)

  43. 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…

  44. 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

  45. Several key points: GCB • Symmetricaltreatment 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 cashto citizens • No fine targeting, but broad categories • Use NGOs and citizen groups

  46. Book “Worlds Apart: Measuring International and Global Inequality” • Email: bmilanovic@worldbank.org • Website: http://econ.worldbank.org/projects/inequality

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