1. Extreme inequality: evidence from Brazil, India,
American Economic Association Annual Meeting | Global Inequality and Policy
January 6, 2018 | Philadelphia, PA
Extreme inequality: evidence from Brazil, India,
the Middle East and South Africa
What were
Lydia Assouad
Lucas Chancel
Marc Morgan

2. Introduction: re-examining extreme inequality with more systematic data
Long run income inequality dynamics in high income countries has been relatively well documented. However, up to very recently in many emerging countries, lack of data to systematically track income inequality.
Recent release of new administrative tax data in these countries. Systematic combination of this novel data with survey data and national accounts allows us to re-examine the structure and dynamics of income inequality.
Focus on Brazil, India, the Middle East and South Africa: regions characterized by extreme inequality levels today.
Middle East can be a meaningful level to track inequality.

3. PART I
Dealing with data limitations to measure inequality in emerging countries
Official data based on self reported household surveys tend to underestimate top income levels.(Cf. « Arab inequality puzzle » for example.)
Reconstructing more reliable estimates based on additional sources is fraught with methodological difficulties (gap between survey and national accounts, inconsistencies between micro and macro concepts).
Systematic reconstructions based on fiscal data, surveys and national accounts (in line with « Distributional National Accounts ») are however possible and stand out as robust to a wide range of alternative assumptions.

4. Survey data often miss a large part of the picture: in Brazil, recent decrease in inequality according to household surveys, not in corrected estimates.
Strong growth in Brazil since 2003, 18% increase in real per adult income after stagnation in the previous two decades.
Fall in Gini by 7 to 10 percentage points in Brazil according to surveys.
Surveys tend to underreport top incomes due to underreporting, undersampling (but also conceptual issues in the definition of income.)

5. The missing income challenge in emerging countries
Survey income represents around 30-50% of national income in emerging countries. Ratios sometimes higher (60% Brazil in recent years) but can be as low as 20-30% (eg. Gulf countries).
How is missing income distributed? Some argue that all of it goes to the top (Lakner and Milanovic, 2013)  method likely to overestimate of inequality.

6. Distributional National Accounts framework: systematic combination of fiscal data, household surveys and nat. accounts  we seek to distribute National Income
We prefer to use Generalized pareto interpolation (Blanchet et al. 2017) to merge survey data and fiscal data.
We assume that surveys are accurate from percentile p0, up to a given percentile of the distribution (p1) and that tax data is accurate from percentile p2 up to the top.
p2 is given by number of income tax payers, we test different values for p1 and different junction profiles between p1 and p2.
We then upgrade proportionally all groups so that total income matches national income to facilitate international comparisons (this modifies income levels but no impact on shares).

7. Combining fiscal and survey data bridges part of the gap to national income, not all of it. Remaining missing income distributed to all groups (no impact on shares).

8. Impact of alternative scenarios on inequality estimates: the case of India (benchmark on the lower bound)
Source: Chancel & Piketty (2017)

9. The world inequality frontier and the structure of extreme inequality
PART II
The world inequality frontier and the structure of extreme inequality
Income inequality in Brazil, India, the Middle East and South Africa is characterized by very high top 10% share and remarkably low middle 40%.
Question: these four countries/regions set a world inequality frontier?
At the top, income levels in extreme inequality countries similar to high-income countries, but extremely low income levels at the bottom.

10. Brazil, India, the Middle East, South Africa: the world inequality frontier ?

11. Brazil, India, the Middle East and South Africa: top 10% income share above 50% and particularly low middle 40% income share (around 30%, vs. 40% in Europe / US)

12. The top groups in extreme inequality regions have income levels broadly similar to high-income countries.

13. The multifaceted origins of extreme inequality
PART III
The multifaceted origins of extreme inequality
Extreme income inequality generally associated with historical legacy of racial discrimination and rigid inequality status (S. Africa, Brazil, India).
There are exceptions though. Middle East: geographical concentration of oil resources, arbitrary frontiers drawn by the West. India: combination of historical social segregation and post-1980s unequal growth.

14. Brazil: slightly better-off bottom 50%, elite maintained, squeezed middle class. ↑ transfers and ↓ labour inequality but lack of major land and fiscal land reform
Top 10%, Middle 40% and Bottom 50% national income shares in Brazil,
Last country to abolish slavery in 1887, with 30% of slaves at the time.

15. South Africa: despite end of the Apartheid in 1994, no major land or fiscal reform.
Top 10% and top 1% income share in S. Africa, Middle East, Brazil

16. The Middle-East: enormous between-country inequality due to the geography of oil ownership.
Total educational investment of Egypt (80m pop) is 100 times smaller than oil revenues in UAE and Qatar (1m).

17. … along with large within-country inequality in Gulf countries, dual society of migrants vs. natives

18. India: a very unequalizing liberalization and deregulation process initiated in the 1980s. The top 0.1% captured more growth than the bottom 50% since 1980.

19. Concluding remarks
Different origins of extreme inequality. Oil, frontiers and finance (Middle East) as well as liberalization & deregulation (India) can be at least as powerful income inequality generating mechanisms as slavery and racial discrimination (Brazil, SA).
Striking similarities: presence of regressive tax systems in all the five countries, high indirect taxation and (near) absence of inheritance taxes.
More and better data is critical to assess to address extreme inequality levels. In certain countries, there is an issue with data transparency and quality per se, quite independent of the levels of inequality observed. Need for reconciliation of surveys and national accounts, making tax data more transparent.
Modern inequality generation mechanisms, whether oil and finance in the case of the Middle East, or a certain type of economic policy mix in the case of India, can create levels of inequality that are as extreme than old racial segregation.