Where in the world are you? Branko Milanovic Development Research Group, World Bank Assessing the importance of circumstance and effort in a world of different mean country incomes and (almost) no migration

Rawlsesque global “original position” Assume Rawls’-like veil of ignorance for all citizens of the world where two characteristics, citizenship and social class are “allocated” to each individual How much of one’s income position in the world will be determined by one’s location (circumstance) and how much by one’s social class (in his/her country) which is a combination of circumstance and effort

(1) Country allocation. Two public goods: mean income of the country, and inequality (Gini). There is no migration: country allocation is “fate” (but “morally arbitrary” or “circumstance”) (2) Social class allocation. With perfect mobility (if ρ between class allocation and outcome=0) => all effort and luck. With no mobility at all, all circumstance. Real life: ρ in rich countries between 0.3 and 0.6 (circumstance between 10% and 36%; take the average of ¼). Country allocation determines mobility and hence also the share of circumstance vs. effort in the second element.

Motivation How important foir our life-chances (position in the world) is (i) country of citizenship, (ii) social class where we are born, (iii) inequality in that country Then, given our social class, how do mean country income and distribution interact (does their importance vary for low and high social classes).

Questions: How much of one’s life chances will be determined by his assignment to a given country vs. given social class? Does this systematically vary with social class? How much can one improve one’s position in world income distribution through his own effort (by climbing social ladders in his country)? What is equality of opportunity globally (across all individuals in the world)? How much of global inequality is ‘morally arbitrary’, inequality which, according to Rawls (TJ), ought to be, within each nation-state, reduced or eliminated?

Short review of the data we use (WYD database, 2002)

Population and income coverage of the surveys (in %) AfricaAsiaLatin America E.EuropeWENAOWorld Population Income Number of surveys (countries) Source: World Income Distribution database. Note: WENAO is Western Europe, North America and Oceania (Australia and New Zealand). Eastern Europe included all formerly Communist countries (including CIS countries).

Definitions of variables: Position in the world: one’s income (based on household per capita $PPP income or expenditures) percentile position in global income distribution (1 to 100) Social “class”: one’s income position in national income distribution (running from 1 to 20; ventiles) Gini and mean country income from household surveys

Inequality in the world—by countries and by social class Source: World Income Distribution (WYD); benchmark year Germany Brazil China Sri Lanka India percentile of world income distribution country ventile

First cut: the between-country component accounts for between 70 to 87 percent of global inequality Global inequality between individuals Between-country component of global inequality Share of (2) in (1) (in %) Relative mean deviation Coefficient of variation Standard deviation of log of incomes Gini coefficient Mehran measure Piesch measure Kakwani measure Theil entropy measure Theil mean log deviation Source: World income distribution (WYD) database. All income expressed in 2002 international dollars.

Role of circumstance and effort, overall

Equation Mean per capita income (in ln $PPP) Gini index (in %) “Social class” (1 to 20) Constant Number of observations R 2 adjusted F value (0) (0) (0) (0) (0) (0) (0) (0) (0) 2.78 (0) (0) (0) 4 (all mean incomes equal) (0) 4.77 (0) 23.1 (0) (0) Explaining one’s position in the world income distribution (dependent variable: percentile in world income distribution)

About 60% of one’s income position in the world determined by one’s location directly (pure circumstance) Another 30% of one’s income position determined by one’s social class (approximately 1/3 of that is pure circumstance) => Roughtly, some 70% of total variability in global income position “explained” by morally arbitrary features

Citizenship premium. If mean income of country where you live increases by 10%, your position in the world goes up by 2.2 percentiles Trade-off. If through effort and luck you jump ahead 5 social classes (e.g. in the US, going from the median household per capita income of $14,000 to $22,000) this is equivalent to a citizenship premium of about 60% (e.g. being born in Mexico rather than in China * ) * China is at the median (unweighted) world income

With a given social class, what is one’s global position likely to be, and how variable will it be?

Likely outcome: Median global position as function of social class Note: unweighted data, each country’s ventile represents one observation.

Variability: Standard deviation of one’s position in world income distribution as function of one’s social class

Can top and bottom social class ever intersect? Density function of one’s position in the world as function of one’s social class Note: Unweighted data, each country’s ventile represents one observation. Top social class Bottom social class

ventile1210….1920 Mean country income ($PPP) 23.4 (0) 24.9 (0) (0) (0) (0) Ventile share (% of national Y) (0) (0) 5.63 (0) 1.46 (0) (0) Constant (0) (0) (0) (0) 18.3 (0) Adj. R No of observations110 F value519 (0) 1101 (0) 1310 (0) (0) (0) Explaining a person’s position in world income distribution— given his national social class (ventile) Note: Ventile share expressed in percent of total country income. Mean per capita income in $PPP per annum. p-values between brackets.

Results: Citizenship premium larger for low social classes than high social classes: each 10% increase in mean country income associated with 2.4 percentoile gain for the poor, and only 1.2 percentale gain for the rich. But how important is country’s distribution relative to mean country income (at different ventiles)?

The trade-off: if your social group’s share increases by one standard deviation (i.e., you get allocated a much more equal or unequal country), how much is it worth compared to being allocated a mean- richer country?

Average share of each ventile in national income distributions and standard deviation of that share (globally; all in percent of total national income) Share of total income Not much variability in income shares

Value of one standard deviation increase in the ventile share at different points of national income distribution (measured in terms of mean country income)

If allocated very low social class, a 1σ increase in ventile share will boost your position as much as being allocated a 50% mean-richer country (=>distribution matters) The same true for very high social classes: distribution matters But in the middle, an increase of 1σ does not really mean much (the shares of the middle ventiles are fairly constant across countries) The equivalent citizenship premium

Conclusion Citizenship premium. Given social class, mean country income matters the most for low social classes and its importance decreases monotonically as social class goes up But country’s distribution (measured by equivalent country premium) is very important for low social classes and top social classes, and does not matter for the middle

The bottom line For low social classes, both mean country income and distribution matter For high social classes, distribution matters quite a lot, mean country income less For the middle, only mean country income matters

Go back to Rawls and contrast global inequality to what he would have found reasonable

Rawls on Concept 1 and Concept 3 inequality Neither of them matters Concept 1 (divergence) is irrelevant if countries have liberal institutions; it may be relevant for liberal vs. burdened societies Irrelevance rooted in two key assumptions: (i) political institutions of liberalism are what matters; (ii) acquisition of wealth immaterial Concept 3 is similarly irrelevant once the background conditions of justice exist in all societies But Concept 0 (within-national) inequality matters because the difference principle applies within each people

In Gini terms: Go back to our definition of global inequality Rawls would insist of the minimization of each individual Gini (G i ) so that Term 1 (within-inequality) would be minimized. But differences in mean incomes between the countries can take any value. Term 2 (between inequality) could be very high. And this is exactly what we observe in real life. Term 2 accounts for 85% of global Gini. Term 1 Term 2

Global inequality under different scenarios Gini Current (2002) global inequality64.2 Inequality if everybody in a country had mean income of his/her country (the between component = “Rawlsian inequality”) 55.1 Inequality if all mean incomes become equalized (the between component disappeared; both πs and the overlap would change) 37.5 All mean incomes equal; all indivudual incomes equal 0

All equalDifferent (as now) All equal055.1 (all country Ginis=0) Different (as now) 37.5 (all country Ginis as now; πs change) 64.2 Mean country incomes Individual incomes within country Global Ginis in different worlds

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) Source: Bourguignon and Morrisson (2002) and Milanovic (2005)

Some Country Comparisons

Position spanNational GiniAverage position (rank) of individuals Position (rank) of the person with country’s mean income Countries with the largest position span (>=95) Colombia Brazil Kampuchea Paraguay Nicaragua Panama Countries with the smallest position span (<25) Luxembourg Denmark Norway Finland Other selected countries USA United Kingdom Russia Nigeria India Indonesia China Position span and national Gini Coefficient

Low global position of low social classes in the UK Source: WYD database for the benchmark year UK Spain Germany percentile in global income distribution social class

Position curves for urban areas in China and India, year 2002 Source: WYD data for the benchmark year China-urban India-urban percentile in global income distribution social class

Position curves for urban and rural areas in India, year 2002 Source: WYD data for the benchmark year India-rural India-urban percentile in global income distribution social class

Same income at the top, vastly different incomes elsewhere: Hungary, Ukraine and Peru Source: WYD data for the benchmark year Hungary PeruUkraine percentile in global income distribution social class

Two among most unequal countries in the world; yet different position of the middle class: Brazil and South Africa, 2002 Brazil South Africa percentile in global income distribution social class

Similarity between Russia and urban China Source: WYD database for the benchmark year China-urban Brazil Russia percentile in global income distribution social class