Trends in global income inequality and their political implications

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1 Trends in global income inequality and their political implications LIS Center; Graduate School City University of New York Talk at the Stockholm School of Economics, September 1, 2014

2 A. National inequalities mostly increased

3 Ginis in 1988 and twenty years later Change Average Gini Pop-weighted Gini GDP-weighted Gini Countries with higher Ginis (38) Countries with lower Ginis (20) From final-complete3.dta and key_variables_calcul2.do

4 Ginis in 1988 and 2008 Gini in PRY CHL PAN ECU MEX NGA PER CRI DOM URY MYS ARG SLV MKD UGA VEN USA SGP RUS PHL CIV LKA MAR ISR MRT THA CHN-R IND-U TUR KGZ ROU LVABIH PRTIDN-U MDA CHN-U CAN KOR LTUHRV AZE GBR JOR POL BGD FRA GRC TJK JPN ARM ITA EST IDN-R DEU IND-R ESP EGY TWN PAK IRL UKR BGR BEL HUN CYP SRB NLD FIN AUT CZE SVK SWE NORDNK SVN BOL COL HND Gini in 1988 GTM BRA From key_variables_calcul3.do

5 Ginis in 1988 and 2008 (population-weighted countries) Gini in CHN-U RUS CHN-R IND-R USA NGA IND-U MEX BRA Gini in 1988 From key_variables_calcul3.do

6 Issues raised by growing national inequalities Social separatism of the rich Hollowing out of the middle classes Inequality as one of the causes of the global financial crisis Perception of inequality outstrips real increase because of globalization, role of social media and political (crony) capitalism (example of Egypt) Hidden assets of the rich

7 Some long-term examples set in the Kuznets framework

8 50,0 Inequality (Gini) in the USA (gross income across households) 48,0 46,0 44,0 42,0 40,0 38, From ydisrt/us_and_uk.xls

9 Kuznets and Piketty frames 70 Ginis for England/UK and the United States in a very long run USA England/UK From uk_and_usa.xls 9

10 Contemporary examples of Brazil and China: moving on the descending portion of the Kuznets Brazil curve China, Gini Gini ln GDP per capita ln GDP per capita updated Giniall Fitted values updated Giniall lowess Giniall lngdpppp twoway (scatter Giniall lngdpppp if contcod=="bra", connect(l) ylabel(40(10)60) xtitle( ) ytitle(gini) xtitle(ln GDP per capita)) (qfit Giniall lngdpppp if contcod=="bra", lwidth(thick)) From gdppppreg4.dta twoway (scatter Giniall lngdpppp if contcod=="chn" & year>1960, connect(l) ylabel(40(10)60) xtitle( ) ytitle(gini) xtitle(ln GDP per capita)) (qfit Giniall lngdpppp if contcod=="chn" & year>1960, lwidth(thick)) From gdppppreg4.dta 10

11 B. Between national inequalities remained very high even if decreasing

12 Distribution of people by income of the country where they live: emptiness in the middle (year 2013; 2011 PPPs) Percent India, Indonesia China Brazil, Mexico, Russia W.Europe, Japan USA GDP per capita in 2005 PPP From defines.do in interyd

13 percentile of world income distribution Different countries and income classes in global income distribution in Russia USA China India Brazil From calcu08.dta country percentile

14 Denmark Mozambique Mali Tanzania Uganda country ventile

15 80 Percentage of country's population that belongs to the global top decile USA Germany France Japan Russia South Brazil China Morocco Egypt India Indonesia Africa

16 C. Global inequality is the product of within- and between-county inequalities How did it change in the last 25 years?

17 Essentially, global inequality is determined by three forces What happens to within-country income distributions? Is there a catching up of poor countries? Are mean incomes of populous & large countries (China, India) growing faster or slower that the rich world?

18 Gini coefficient Global inequality : three concepts China moves in Concept 3 Concept 2 Concept 1 Divergence begins 52 Divergence ends year

19 The effect of the new PPPs on countries GDP per capita (compared to the US level) SAU ZMB SDN JOR GHA IDN MNG SUR OMN KWT PAK EGY NPLBGD FJI AZE KAZ QAT YEM CIV LAO CPV DZA THA MDG LKA MAC VNMPHLGTM NER BRN MLI MAR HTITCD COG VENRUS GNQ MYS ARE TGO KEN MRT IND MDV LSO BDI SLE UGA KGZ NGAMDA AGONAM BRA GIN CMR SWZ CHN KHM BTNUKR ETH BLR TJK NIC BOL TUNMKD GNB RWA BFA BEN SEN GEO PRY MNE ARM BIH BGR TUR LVA CAF MWI HND SLV BLZECU DOM PER HUN SGP COL MEX URY CHL TTO SRB ZAF LTU EST MUS HRV POL TZA JAM CRIGAB SVK MLT ITA DNKCHE NOR LUX NZL PAN PRT GRCESP FRA FIN TWN BEL DEU SWE IRLUSA MOZ DJI ALB CZE SVN ISR ISL AUT AUS CAN NLD JPN HKG LBR KOR GBR GMB BWA CYP BHS -50 COM gdppc in 2011ppp C:\Branko\worldyd\ppp\2011_icp\define

20 Country The effect of new PPPs GDP per capita increase (in %) GDP per capita increase populationweighted (in %) Indonesia Pakistan Russia India China Africa Asia Latin America Eastern Europe WENAO 3 2

21 Concept 1 and 2 international inequality with 2011 PPP values.65 all countries.6.55 Without China.5 Without India and China year defiine.do in interyd

22 Non-triviality of the omitted countries (Maddison vs. WDI) Population coverage Africa Asia E.Europe LAC WENAO World

23 Large countries and the world, from s to today China World Brazil Russia United States GDP per capita in PPP dollars c:\branko\glob_talks_and_opeds\opeds_interviews\finance_development\figures\figure2 Using gdppppreg5.dta

24 D. How has the world changed between the fall of the Berlin Wall and the Great Recession

25 Real PPP income change (in percent) Real income growth at various percentiles of global income distribution, (in 2005 PPPs) $PPP2 X China s middle class $PPP $PPP4.5 $PPP X US lower middle class From twenty_years\final\summary_data Percentile of global income distribution Estimated at mean-over-mean

26 Real PPP income change (in percent) Real income gains (in $PPP) at different percentile of global income distribution World Without China Percentile of global income distribution

27 Quasi non-anonymous GIC: Average growth rate for different percentiles of the 1988 global income distribution

28 Growth incidence curve ( ) estimated at percentiles of the income distribution mean growth percentile of global income distribution Using my_graphs.do Mean-on-mean

29 Distribution (in percent) of gain Distribution of the global absolute gains in income, : more than ½ of the gains went to the top 5% ventile/percentile of global income distribution From summary_data.xls

30 Best and worst performing parts of the 1988 distribution growth>50% Asia highlighted growth<25% mature econ highlighted CHN-U CHN-R IDN-U IDN-R real growth PAK CHN-U CHN-R THA IDN-U MYS IDN-R FIN USA POL POL EST CZE GRC EST CZE CZE EST GRC CZE CZE GRC DNK CZE USA CYP USA TUR ARG GRCDNK DEU URY DEU GRC DNK SVK DEU ARG URY ARG DEU URY SVKSVK SVK SVK ARG AUT AUT PRYAUT JOR ROU JPN JPN LVA ROU ROU LVA LVA LVA LVA JPN LVA LVA VEN BGR BGR JPN BGR BGR BGR BGR real pc income in real pc income in 1988 From my_graphs.do

31 Annual per capita after-tax income in international dollars US 2nd decile 5000 Chinese 8th urban decile From summary_data.xls

32 Global income distributions in 1988 and density Emerging global middle class between $3 and $ log of annual PPP real income twoway (kdensity logrrinc [w=pop] if logrrinc>2 & bin_year==2008 & keep==1 & mysample==1) (kdensity logrrinc [w=pop] if logrrinc>2 & bin_year==1988 & keep==1 & mysample==1, legend(off) xtitle(log of annual PPP real income) ytitle(density) text( "1988") text( "2008")) Or using adding_xlabel.do; always using final_complete7.dta

33 Increasing gains for the rich with a widening urban-rural gap Urban and rural China Urban and rural Indonesia combined real_growth 1 and 2 urban rural urban rural decile decile From key_variables_calcul2.do

34 E. Issues of justice and politics 1. Citizenship rent 2. Migration 3. Hollowing out of the middle classes

35 Global inequality of opportunity Regressing (log) average incomes of 118 countries percentiles (11,800 data points) against country dummies explains 77% of variability of income percentiles Where you live is the most important determinant of your income; for 97% of people in the world: birth=citizenship. Citizenship rent.

36 Is citizenship a rent? If most of our income is determined by citizenship, then there is little equality of opportunity globally and citizenship is a rent (unrelated to individual desert, effort) Key issue: Is global equality of opportunity something that we ought to be concerned or not? Does national self-determination dispenses with the need to worry about GEO?

37 The logic of the argument Citizenship is a morally-arbitrary circumstance, independent of individual effort It can be regarded as a rent (shared by all members of a community) Are citizenship rents globally acceptable or not? Political philosophy arguments pro (social contract; statist theory; self-determination) and contra (cosmopolitan approach)

38 The Rawlsian world For Rawls, global optimum distribution of income is simply a sum of national optimal income distributions Why Rawlsian world will remain unequal?

39 Global Ginis in Real World, Rawlsian World, Convergence World and Shangri-La World (Theil 0; year 2008) Individual incomes within country All equal Mean country incomes All equal 0 Different (as now) 68 (all country Ginis=0) Different (as now) 30 (all mean incomes same; all country Ginis as now) 98

40 Conclusion Working on equalization of within-national inequalities will not be sufficient to significantly reduce global inequality Faster growth of poorer countries is key and also

41 Migration: a different way to reduce global inequality and citizenship rent A new view of development: Development is increased income for poor people regardless of where they are, in their countries of birth or elsewhere Migration and LDC growth thus become the two equivalent instruments for development

42 Political issue: Global vs. national level Our income and employment is increasingly determined by global forces But political decision-making still takes place at the level of the nation-state If stagnation of income of rich countries middle classes continues, will they continue to support globalization? Two dangers: populism and plutocracy To avert both, need for within-national redistributions: those who lose have to be helped

43 Final conclusion To reduce global inequality: fast growth of poor countries + migration To preserve good aspects of globalization: redistribution within rich countries

44 Additional slides

45 H. Global inequality over the long-run of history

46 Global income inequality, (Source: Bourguignon-Morrisson and Milanovic; 1990 PPPs ) 100 Theil Gini year twoway (scatter Gini year, c(l) xlabel(1820(40)2020) ylabel(0(20)100) msize(vlarge) clwidth(thick)) (scatter Theil year, c(l) msize(large) legend(off) text( "Theil") text( "Gini"))

47 A non-marxist world Over the long run, decreasing importance of within-country inequalities despite some reversal in the last quarter century Increasing importance of between-country inequalities (but with some hopeful signs in the last five years, before the current crisis), Global division between countries more than between classes

48 Theil 0 index (mean log deviation) Composition of global inequality changed: from being mostly due to class (within-national), today it is mostly due to location (where people live; betweennational) Location 40 Location 20 Class 0 Class Based on Bourguignon-Morrisson (2002), Maddison data, and Milanovic (2005) From thepast.xls

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