International inequality (Concepts 1 and 2)

Milanovic, “Global inequality and its implications”

Lectures 3-5

Definitions

Three concepts of inequality definedConcept 1 inequality

Concept 2 inequality

Concept 3 (global) inequalty

DefinitionsDifferent types of inequality

Individuals in:

Countries in:

Countries

The usual within-country distributions (e.g. inequality in the US is greater than in Sweden)

-----

World

Global income distribution: distribution of persons in the world (comparable prices)

Distribution of countries’ GDP per capita (rich vs. poor countries; are the poor countries catching up or not; the convergence literature) (comparable prices)

What world inequality are we talking about?

Concept 1: unweighted

inter-national inequality

Concept 2: weighted inter-

national inequality

Concept 3: “true” world

inequality

Main source of data

National accounts

National accounts

Household surveys

Unit of observation

Country Country

(weighted by its population)

Individual

Welfare concept

GDP or GNP per capita

GDP or GNP per capita

Mean per capita disposable income or

expenditures National currency conversion

Market exchange rate or PPP exchange rate (but different PPP concepts used)

Within-country distribution (inequality)

Ignored Ignored Included

Comparison between the three concepts of inequality

Concept 1 inequality, 1950-2000

 Coverage: number of countries and share of world population

Inequality between countries

0

20

40

60

80

100

120

140

160

Year

Nu

mb

er

of

co

un

trie

s o

r co

vera

ge o

f w

orl

d p

op

ula

tio

n

Number of countries included

Coverage of world population (in %)

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)

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

• 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.)

State steady level of 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!

gnsAey gt /([*

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)

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 yesrs (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)

Going back to the 1978-2000 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)

Different way to look at world growth rates

1960-1980 1980-2000

Unweighted (each country counts the same)

2.9 0.8

Percentage negative 23 33

China 2.7 8.2

India 1.2 3.6

Population-weighted 3.0 3.2

World 2.6 1.6

Annual per capita growth rates 1980-2002Mean Median Percentage

negative

“Old OECD” 1.9 2.0 17

Middle income countries

1.0 1.8 33

LLDC 0.1 0.8 43

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

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

Africa Asia WENAO LLDC

Big time winners (>58%)

13 90 7 26

Winners 34 7 93 27

Losers 44 3 0 38

Big time losers (>20%)

9 0 0 9

Total 100 100 100 100

The Four Worlds

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.

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

1960 1978 2000

First tosecond

Portugal (3205)Croatia (3085)

Portugal (7993)Puerto Rico(7662)

Greece (13821)Barbados(13297)

Second tothird

Haiti (2139)Malaysia (2120)

Armenia (5294)Fiji (5156)

Malaysia (9887)Slovak (8595)

Third tofourth

Nigeria (1080)Madagascar(1031)

Guyana (2728)Cote d’Ivoire(2649)

Egypt (4630)Bulgaria (4313)

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

1960-78

1978-2000

0 5 10 15 20 25 30 35 40 45

1

2

Number of countries

Upwardly mobile

Downwardly mobile

Four Worlds 1960

Four Worlds 2003

Four worlds in 1960 and 20031960 2003

Number of countries

% of population

Number of countries

% of population

First 41 26 27 16

Second 22 12 7 2

Third 39 13 29 37

Fourth 25 49 72 46

Parts of Africa where 2000 GDI per capita is less than in 1980 (350m people )

Poorer than during Carter

US GDI per capita in the meantime increased 50%

Parts of Africa where 2000 GDI per capita is less than in 1963 (180m people )

Poorer than during J.F. Kennedy

US GDI per capita in the meantime doubled

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.

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")

standard deviation of all EBRD indicators

standard deviation of GDI per capita

2000

2500

3000

3500

st d

ev. o

f gdp

ppp

per

capi

ta

23

45

6st

dev

of a

ll E

BR

D in

dica

tors

1990 1995 2000 2005Year...

LAC countries: continued output divergence despite policy convergence

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

1985-1988 1988-1991 1992-1994 1995-1997 1998-1999

3.2

3.3

3.4

3.5

3.6

3.7

3.8

3.9

4

St deviation of the Lora reform indexindicator

St. deviation of GDI per capita

The two periods of international growth

Period Mean (unweighted) incomes: “Rest against West”

Regional homogeneity

1960-1978 Rest catching up Strong divergence in Asia & Africa; divergence in EEurope/FSU; mild convergence in WENAO and LAC

1978-2000 All falling behind except Asia

Continued strong divergence in Africa, joined by EEurope; mild divergence in Asia & LAC; continued convergence in WENAO only

Concept 2 inequality,

1950-2000

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

The mother of all inequality disputes

0.400

0.500

0.600

0.700

Year

Gin

i in

dex

Unweighted

Population-weighted

Global inequality

• In Gini terms:

• where Gi=individual country Gini, π=income share, yi = country income, pi = popul. share, μ=overall mean income, n = number of countries

• In Theil:

LppyypG j

n

ij

iij

n

i

n

i

iii

)1

1

i

n

i

i

n

i

iy

pTip

ln1

How are Concepts 2 and 3 related?

Inequality between population-weighted countries

0.500

0.540

0.580

0.620

0.660

0.700

0.740

0.780

1950

1952

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

Theil

Gini

According to Concept 2, there is convergence among countries…

...or maybe there is not

0.400

0.440

0.480

0.520

0.560

0.600

1950

1952

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

Gin

i co

effi

cien

t

World without India and China

World without China

World

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)

Implied China’s GDP per capita in different years According to different sources

PWT 6.1 Maddison World Bank

1952 568 627 262

1960 662 785 497

1966 773 879 534

1978 899 1142 754

1988 1703 2119 1676

1999 3319 3803 3867

2000 3642 na 4144

Concept 2 inequality for different versions of China’s GDP per capita

0.4600

0.4800

0.5000

0.5200

0.5400

0.5600

0.5800

Years

Gin

i

World Bank

Maddison

Penn World Tables

…and breaking China and India into their provinces/states. Inter-national population-weighted inequality:

with China and India replaced by their provinces and states 

40.0

45.0

50.0

55.0

60.0

65.0

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Year

Gin

i ind

ex

Countries only

Countries and regions of China and India

Countries and regions of China (R/U) and India

How much has Concept 2 inequality changed (Gini points;

1985-00)?World Bank

dataMaddison

dataWholecountries

-3.3 -1.9

ChIIBus bystates + wholecountries

-4.0 -2.3

R/U for China -3.3 -1.9

Distribution of people according to income of country where they live (ln GDPPPP pc;

countries/provinces/states/R-U China, 1980-00

0.1

.2.3

.4kd

ensi

ty ln

gdp

6 7 8 9 10 11x

kdensity lngdp kdensity lngdp

twoway (kdensity lngdp [w=popu] if Dgrand2==1 & year==1980 & lngdp<11)

20001980

Distribution of people according to income of country where they live (GDPPPP pc; countries

only 1980-2000

0.0

0005

.000

1.0

0015

kden

sity

gdp

ppp

0 10000 20000 30000 40000 50000x

kdensity gdpppp kdensity gdpppp

From one to two poles? Concept 2 inequality in 1955

and 20000

.1.2

.3.4

.5kd

en

sity

lng

dp

6 7 8 9 1 0 1 1x

k d e n s i t y ln g d p k d e n s i t y ln g d p

twoway (kdensity lngdp [w=popu] if Dcont==1 & year==1955 & lngdp<11) (kdensity

Concept 2 between 1980 and 2000

Contributes to decline (equilibrating factors)

• Inclusion of provinces/states of China, India, Brazil, Indonesia, US (even if many within themselves are diverging!) 0.5 point

Reverses decline (disequilibrating factors)

• Higher (old) income level in China (Maddison) 1.5 points

• Inclusion of rural/urban break up of China 0.5 points

Result: we shave off half of the Concept 2 decline