International inequality (Concept 3)Milanovic, Global inequality and its implicationsLectures 6-9
In Gini terms:
where Gi=individual country Gini, =income share, yi = country income, pi = popul. share, =overall mean income, n = number of countriesIn Theil: How are Concepts 2 and 3 related?
1. Inequality between world citizens today
Methodological issuesGDI per capita or HS meanDefinitional difference (H&E, undisbursed profits) andPractical difference (under-surveying of the rich and under-reporting of property Y)Mixing of the two biases both poverty and inequality downMoreover, 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. countriesIssues: self-employed Y, home C, imputation of housing, treatment of publicly provided H&E, use of top coding, under-estimation of property incomesWhat PPP to useEquivalence scales & intra-HH inequality
The difficulty stems from contradictory movementsGreater inequality within nationsGreater differences between countries mean incomes (think of US vs. Africa)But catching up of large and poor countriesAll 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 coverageNon-triviality of the omitted countries (Maddison vs. WDI)
GDI (US dollar) coverage
Number of surveys (C-based)
Global inequality(distribution of persons by $PPP or US$ income per capita)
Confrontation with other Concept 3 calculations
Concept 2 inequality
Sala-I-MartinMilanovicBourguignonDowrick and akmalDikhanovChotikapanichBhallaSutcliffeConcept 2
Global (concept 3) distribution is not well approximated by theoretical lognormal distribution
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)18702000Based on Bourguignon-Morrisson (2002) and Milanovic (2005)
A literary comparison: Elizabeths dilemma1820 position estimates based on Colquhoun 1801-3 data. 2000 data from LIS, and for 0.1% from Piketty (Data-central).
Share of between-country inequality in total inequality
4. Global inequality (cont.)
A 90-10 world: fifty-fifty
What is a Gini of 64-66; how big is it?
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")
Germanyurban ChinaBrazilSri Lankarural India020406080100percentile of world income distribution05101520country ventileYear 2002
NoteNot even richest people in rural Indonesia intersect with poorest people in Germany Very little overlap between people in Sri Lanka and GermanyBut 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
5. Globalization, policy convergence and income divergence
Causal effect of globalization (openness) on global inequalityChannel 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 countriesDepends 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 distributionIn 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 richNo 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 governmentNo one can do much about itNo 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 levelspermit[s] an increaseof political tensions BECAUSE
the political misery of the poor, the tension created by the observation of the much greater wealth of other communitiesmay 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 migrationGreater likelihood of conflict (Jennifer Government)
We need some rules for global transfersThey 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 implicationsProgressive transfer at the global level and worsening national distributions (may not be politically sustainable)
Thus transfers have to satisfyProgressivity 1: reduce mean income differences between rich and poor countriesGlobal progressivity: tax payers should be richer than beneficiariesNational 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 transfersTransfers 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 (poo