1. Global income inequality: what it is and why it 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 1 inequality Concept 2 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 1988199319982002 Africa48766763 Asia93959495 EEurope999510099 LAC87929396 WENAO92959799 World8792 Non-triviality of the omitted countries (Maddison vs. WDI)

11. GDI (US dollar) coverage 1988199319982002 Africa49857159 Asia94939695 EEurope999610099 LAC909395 WENAO9996 99 World96959697

12. Number of surveys (C-based) 1988199319982002 Africa14(11)30(27)24(24)23(23) Asia19(10)26(18)28(20)24(16) EEurope27(0)22(0)27(14)27(16) LAC19(1)20(4)22(2)21(1) WENAO23(0) 21(3)20(2) World102(22)121(52)122(63)115(58)

13. 1988199319982002 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)

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

16. 1988199319982002 Between country Gini (PPP dollars) 51.654.253.154.9 Share of total inequality (in %) 83 84 Between country Gini (US dollars) 69.571.770.873.3 Share of of total inequality (in %) 89908991 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 19602003 Number of countries % of population Number of countries % of population First41262716 Second221272 Third39132937 Fourth25497246

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 China India, Nigeria WEur, Japan USA Brazil, Russia Mexico 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. Year 2002Year 1960 Approximate % of foreign workers in labor force Ratio of real GDI per capita Greece (Albanians) 7.54 to 12.2 to 1 Spain (Moroccans) 12.04.5 to 12.3 to 1 United States (Mexicans) >10.04.3 to 13.6 to 1 Austria (former Yugoslavs) 10.02.7 to 12.6 to 1 Malaysia (Indonesians) >10.05.3 to 11.5 to 1

25. 5. Global inequality (cont.)

26. A 90-10 world: fifty-fifty Cumulative % of world population Cumulative % of PPP world income/consumption In a single country (UK) 50.2 100.72.0 252.9 509.625.0 7524.7 9050.471.5 Top 1049.628.5 Top 532.718.4

27. What is a Gini of 64-66; how big is it? TopBottomRatio 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 countries31,85058055-1 10 countries28,06666042-1

28. First order dominance (year 2002) expressed in terms of percentile of world income distribution 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") Germany Sri Lanka Russia Brazil Indonesia 0 20 40 60 80 100 percentile of world income distribution 05101520 country ventile

29. 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

30. Poor and rich people and countries, 1998 People Countries PoorMiddle income RichTotal Poor3879210964185 Middle1893552277 Rich92115707913 Total41603608555375

31. 6. Globalization, policy convergence and income divergence

32. 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?

33. 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.

34. 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")

35. LAC countries: continued output divergence despite policy convergence

36. 7. Does Global Inequality Matter?

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

38. 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.”

39. 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.”

40. 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)

41. 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.

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

43. 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)

44. 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…

45. 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

46. 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

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