International inequality (Concept 3)
Milanovic, “Global inequality and its implications”
Lectures 6-9
• 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:
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How are Concepts 2 and 3 related?
1. Inequality between world citizens today
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?
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
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)
2. First calculations of global inequality from household survey
data alone
Population coverage
1988 1993 1998 2002
Africa 48 76 67 66
Asia 93 95 94 96
EEurope 99 95 100 97
LAC 87 92 93 96
WENAO 92 95 97 99
World 87 92 92 92
Non-triviality of the omitted countries (Maddison vs. WDI)
GDI (US dollar) coverage
1988 1993 1998 2002
Africa 49 85 71 66
Asia 94 93 96 95
EEurope 99 96 100 99
LAC 90 93 95 95
WENAO 99 96 96 100
World 96 95 96 98
Number of surveys (C-based)
1988 1993 1998 2002
Africa 14(11) 30(27) 24(24) 24(24)
Asia 19(10) 26(18) 28(20) 26(18)
EEurope 27(0) 22(0) 27(14) 26(16)
LAC 19(1) 20(4) 22(2) 21(1)
WENAO 23(0) 23(0) 21(3) 21(2)
World 102(22) 121(52) 122(63) 118(61)
1988 1993 1998 2002
International dollars
Gini index
61.9
(1.8)
65.2
(1.8)
64.2
(1.9)
65.2
(1.6)
US dollars
Gini index
77.3
(1.3)
80.1
(1.2)
79.5
(1.4)
80.5
(1.1)
Global inequality(distribution of persons by $PPP or US$ income per capita)
Confrontation with other Concept 3 calculations
54
56
58
60
62
64
66
68
70
72
1970 1975 1980 1985 1990 1995 2000
Dikhanov-War d
Bour gignon-Mor r isonMi lanovic
Dowr ick-Akmal
Sala-i -Mar tinChotikapanich-Val .-Rao
Bhal la
Sutcl iff e
Global (concept 3) distribution is not well approximated by theoretical lognormal
distribution0
.2.4
.6.8
Densi
ty
0 5 10ln(inc)
Kernel density estimateNormal density
3. 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)
0
10
20
30
40
50
60
70
80
90
1870 2000
C lass
Location
Location
Class
1870
2000
Based on Bourguignon-Morrisson (2002) and Milanovic (2005)
A literary comparison: Elizabeth’s dilemma
Income in 1820 (£ pa)
Approx. position in 1820 income distribution
Mr. Darcy
10,000 Top 0.1%
Elizabeth’s family
3000/7~430 Top 1%
Elizabeth alone
50 Median
Gain 100 to 1
Income in 1999 (£ pc pa)
270,000
57,000
6,500
40 to 1
1820 position estimates based on Colquhoun 1801-3 data. 2000 data from LIS, and for 0.1% from Piketty (Data-central).
1988 1993 1998 2002
Between country Gini (PPP dollars)
51.6 54.2 53.1 54.9
Share of total inequality (in %) 83 83 83 84
Between country Gini (US dollars)
69.5 71.7 70.8 73.3
Share of of total inequality (in %) 89 90 89 91
Share of between-country inequality in total inequality
4. Global inequality (cont.)
A 90-10 world: fifty-fiftyCumulative % of world population
Cumulative % of PPP world income/consumption
In a single country (UK)
5 0.2
10 0.7 2.0
25 2.9
50 9.6 25.0
75 24.7
90 50.4 71.5
Top 10 49.6 28.5
Top 5 32.7 18.4
What is a Gini of 64-66; how big is it?
Top Bottom Ratio
In $PPP: 5% 33% 0.2% 165-1
10% 50% 0.7% 70-1
In US$: 5% 45% 0.15% 300-1
10% 67.5% 0.45% 150-1
5 countries 31,850 580 55-1
10 countries 28,066 660 42-1
twoway (line Y02_c group if contcod=="BRA") (line Y02_c group if contcod=="IDN-R") (line Y02_c group if contcod=="DEU") (line Y02_c group if contcod=="LKA") (line Y02_c group if contcod=="CHN-U"), legend(off) xtitle(country vent> ile) ytitle(percentile of world income distribution) text(90 3 "Germany") text(62 5 "urban China") text(50 6 "Brazi l") text(52 12 "Sri Lanka") text(40 18 "rural India")
Germany
urban China
Brazil Sri Lanka
rural India
02
04
06
08
01
00
pe
rce
ntil
e o
f w
orl
d in
com
e d
istr
ibu
tion
0 5 10 15 20country ventile
Year 2002
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
Poor and rich people and countries, 1998
People
Countries
Poor Middle income
Rich Total
Poor 3879 210 96 4185
Middle 189 35 52 277
Rich 92 115 707 913
Total 4160 360 855 5375
5. Globalization, policy convergence and income
divergence
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?
• 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.
6. Does Global Inequality Matter?
• No one in “charge” of it; there is no global government
• No one can do much about it
• No 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 levels…permit[s] an increase…of political tensions”
BECAUSE
“the political misery of the poor, the tension created by the observation of the much greater wealth of other communities…may 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 migration
• Greater likelihood of conflict (Jennifer Government)
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 person to a poorer person.
In addition transfers have national income inequality implications
Progressive transfer at the global level and worsening national distributions (may not
be politically sustainable)
T B
Income
Income distribution in poor country
Income distribution in rich country
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)
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…
New Global Welfare AgencyTax 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
Several key points: GCB
• Symmetrical 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 citizens
• No fine targeting, but broad categories
• Use NGOs and citizen groups
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