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Trends in global income

inequality and their political


implications
Branko Milanovic
LIS Center; Graduate School City University of New York

Autumn 2014

Branko Milanovic

A. National inequalities mostly


increased

Branko Milanovic

Ginis in the late 1980s and around now


1985-90

After
2008

Change

Average Gini

36.3

38.8

+2.5

Pop-weighted
Gini

33.9

37.3

+3.4

GDP-weighted
Gini
Countries with
higher Ginis

32.2

36.4

+4.2

32.0

36.2

+4.5

Countries with
lower Ginis

42.8

39.5

-3.3
Branko Milanovic

From final-complete3.dta and key_variables_calcul2.do (lines 2 and 3; rest from AlltheGinis)

60

70

Ginis in the late 1980s and around now

50
40
30

GTM
HND
PAN
CHL

CHN

CRI

ECU DOM
BOLSLV
USA
PER
NGA
MYS
SGP
URY ARG
CIV
UGA
MKD
ISR
GEO
TUR
IRN
MRT
RUS
KOR
THA VEN
PHL
IDN
GBR
LVA BGR
PRT
JOR
LKA
KGZ
IND
CAN
ITA
LTUPOL
FRA GRC MLI
MDAROU
ESP BGD
JPN
TWN
EST
IRL
DEU AZE
TJK
HRV
PAK AUS
BEL
NLD
FIN
AUTKAZ
HUN
NOR ARM
SVK
DNK
SWE
CZE UKR
BLR
SVN

BRA

MEX

Branko Milanovic

20

Gini after 2008

COL

20

30

40
50
Gini between 1985 and 1990

60

twoway (scatter bbb aaa if year==2000, mlabel(contcod) msize(vlarge)) (function y=x, range(20 60) legend(off) xtitle(Gini between 1985 and
1990) ytitle(Gini after 2008)) using allginis.dta

60

Ginis in 1988 and 2008 (population-weighted countries)

BRA

MEX
USA

40

RUS

CHN-R

CHN-U

IND-U

30

Gini in 2008

50

NGA

IND-R
20

Branko Milanovic

20

From twenty_years/ key_variables_calcul3.do

30

40
Gini in 1988

50

60

20

Convergence of countries Ginis: an empirical


observation without theoretical explanation
GTM

10

ECU
ARG
BGR

-10

HUN
POL
CZE

CHN
GBR NZL

CHL

USA

SYC
JAM DOM
HKG
SGP
PAN
VEN
IND
PRI
ISR
COL
IDN
SDN
IRN
ZMB
LKA
BELTWN
FJI
CAN
KOR
THA
SLV
BRA
AUS
GRC
CRI
BOL
NLDESP
SWE
PAK IRL
MEX
BHS
JPN
PRT
BGD
DEUITA
NOR
FIN
BRBMYS
DNK EGY
HND
PHL
TUN
PER
TTO
FRA
TZA
TUR SLE
NPL

-20

GAB

20

30

40
50
average country Giniall before 1980

60

twoway (scatter change_gini gini_pre1980 if nvals==1, mlabel(contcod)) (lfit change_gini gini_pre1980, yline(0, lpattern(dash)) ytitle(change in Gini after 1980)
legend(off))
Using Allthe Ginis.dta

Branko Milanovic

Market, gross and disposable income


Ginis in the US and Germany
Germany

.25

.25

.3

.3

.35

.35

.4

.4

.45

.45

.5

.5

USA

1970

1980

1990
year

Define_variables.do using data_voter_checked.dta

2000

2010

1970

Branko Milanovic

1980

1990
year

2000

2010

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
Branko Milanovic

Some long-term examples set in the


Kuznets framework

Branko Milanovic

Inequality (Gini) in the USA 1929-2009


(gross income across households)
50.0

48.0
46.0
44.0
42.0
40.0
38.0
1929
From ydisrt/us_and_uk.xls

1939

1949

1959

1969

1979

1989

1999

2009

Kuznets and Piketty frames


70

Ginis for England/UK and the United States in a very long run

60
50
USA
40
30

England/UK

20
10
0
1600

1650

1700

1750

1800

1850

1900

1950

2000

2050

From uk_and_usa.xls

11

Contemporary examples of Brazil and China:


moving on the descending portion of the Kuznets
curve
China, 1967-2007

Gini
40

40

50

Gini

50

60

60

Brazil 1960-2010

7.5

8.5
ln GDP per capita
updated Giniall

9
Fitted values

twoway (scatter Giniall lngdpppp if contcod=="BRA", connect(l) ylabel(40(10)60) xtitle(2000


6000 12000) ytitle(Gini) xtitle(ln GDP per capita)) (qfit Giniall lngdpppp if contcod=="BRA",
lwidth(thick))
From gdppppreg4.dta

9.5

7
ln GDP per capita

updated Giniall

lowess Giniall lngdpppp

twoway (scatter Giniall lngdpppp if contcod=="CHN" & year>1960, connect(l) ylabel(40(10)60)


xtitle(2000 6000 12000) ytitle(Gini) xtitle(ln GDP per capita)) (qfit Giniall lngdpppp if
contcod=="CHN" & year>1960, lwidth(thick))
From gdppppreg4.dta

12

B. Between national inequalities


remained very high even if
decreasing

Branko Milanovic

30

Distribution of people by income of the country where they


live: emptiness in the middle (year 2013; 2011 PPPs)

India, Indonesia

10

Percent

20

China

W.Europe, Japan

USA

Brazil, Mexico, Russia

From defines.do in interyd

10000

20000
30000
GDP per capita in 2005 PPP

40000

50000

percentile of world income distribution


10 20 30 40 50 60 70 80 90 100

Different countries and income classes in global income distribution in


2008

USA
Brazil

Russia
China

India

Branko Milanovic

From calcu08.dta

20

40
60
country percentile

80

100

100
90
80

Denmark

50

60

70

Uganda

30

40

Mali

10

20

Tanzania

Mozambique
1

10
country ventile

15

20

Countries with more than 1% of their population in top global percentile


(above $PPP 72,000 per capita in 2008 prices)
14

12

12

10

CHE

SGP

CAN

LUX

5
4

3
2

CYP

DEU

IRL

KOR

NLD

TWN

0
From summary_data.xls

FRA
NOR
GBR
Branko Milanovic

JPN

USA

C. Global inequality is the product of


within- and between-county
inequalities
How did it change in the last 60 years?

Branko Milanovic

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?

Branko Milanovic

.75

Global and international inequality


after World War II

.65

Concept 3

.55

Concept 2

.45

Concept 1

1950

1960

1970

1980
year

1990

2000

Concept2: 1960-1980 from Bourguignon & Morrisson


Defines.do using gdppppreg5.dta

Branko Milanovic

2010

.65

Concept 2 inequality with 2011 PPPs


and without China and India

.55

.6

all countries

.5

Without China

Without India and China

.45

47
1940

Defines.do using gdppppreg5.dta

1960

1980
year

Branko Milanovic

2000

2020

Population coverage
1988 1993 1998 2002

2005

2008

2011

Africa

48

76

67

77

78

78

71

Asia

93

95

94

96

94

98

89

E.Europe

99

95

100

97

93

92

87

LAC

87

92

93

96

96

97

97

WENAO

92

95

97

99

99

97

95

World

87

92

92

94

93

94

88

Branko Milanovic

Non-triviality of the omitted countries (Maddison vs. WDI)

Three important technical issues in the


measurement of global inequality
The ever-changing PPPs in particular for
populous countries like China and India
The increasing discrepancy between GDP per
capita and HS means, or more importantly
consumption per capita and HS means
Inadequate coverage of top 1% (related also
to the previous point0
Branko Milanovic

The issue of PPPs

Branko Milanovic

100

150

The effect of the new PPPs on countries GDP


per capita (compared to the US level)

ZMB SDN
GHA

50

PAK

SAU
JOR
IDN
SUR
MNG

OMN

EGY

KWT

FJI
AZE KAZ
QAT
DZA
CPV
THA
MAC
MDG
LKA
GTM
BRN
PHL
VNM
NER
MAR
RUS
MLI
VEN
GNQ
COG
ARE
TCD
HTI
MYS
MDV
IND
MRT
TGO
KEN
LSOKGZ
NGA MDA
NAM BRA
AGO
CHN
SLE
UGA
SWZ
LVA
SGP
BDI
CHL
NOR
TUR
CMR
PRY
GEO
BTN
UKR
BIHCOLMNE
CHE
LUX
GIN
URY
KHM
HUN
BGR
MEX
SEN
DNK
ARM
ESTMLT
LTU
TTO
BLR
DOM
ITA
MKD
CAF
TUN
NZL
ETH
BOL
ZAF
MWI
BEN
BLZ
HRV
PER
ECU
AUS
HND
SLV
NIC
POL
GNB
SRB
FRA
BEL
TJK
FIN
MUS
SVK
JAM CRIPAN
PRT
GRC
ESP
TWN
SWE
GAB
DEU
AUT
RWA
IRL
USA
BFA
TZA
NLD
CAN
ISL
SVN
ISR
HKG
CZE
DJI
ALB
JPN
MOZ
GBR
KOR
LBR
BWA
CYP
GMB
NPLBGD YEM
CIV LAO

-50

BHS
COM

50000 100000
150000
gdppc in 2011ppp

C:\Branko\worldyd\ppp\2011_icp\define

Branko Milanovic

The effect of new PPPs


Country

GDP per capita


increase (in %)

GDP per capita


increase populationweighted (in %)

Indonesia

90

---

Pakistan

66

---

Russia

35

---

India

26

---

China

17

---

Africa

23

32

Asia

48

33

Latin America

13

17

Eastern Europe

16

24

WENAO

.85

Global income inequality using


nominal dollars

.75

.8

Concept 3

.65

.7

Concept 2

Concept 1

.55

.6

63

1970

1980

From two_concepts_exrate.do using Global_new5.dta

1990
Year

2000

2010

The gap between national accounts


and household surveys

Branko Milanovic

.65

Both the level and change: Use of GDP per capita gives
a lower lever and a faster decrease of global inequality

.6

HS means--countries in HS sample

.55

GDPs pc countries in HS sample

.45

.5

Gini

usual Concept 2

1990

Defines.do based on gdppppreg5.dta

1995

2000
year
Branko Milanovic

2005

2010

2015

How global inequality changes with


different definitions of income
72
71

Step 2

70
69

68

Step 1
GDP ppp

67

Consumption

66

Survey mean

65
64
63
62
Global inequality
Branko Milanovic

Step 1 driven by low consumption shares in China and India


(although on an unweighted base C/GDP decreases with GDP)

1.2

C/GDP from national accounts in year 2008

.6

.8

USA

.4

India

.2

China
1000

10000
GDP per capita in ppp

50000

twoway scatter cons_gdp gdpppp if group==1 & cons_gdp<1.4 [w=totpop], xscale(log) xtitle(GDP per capita in ppp) xlabel(1000 10000 50000)
ytitle(share of consumption in GDP) title(C/GDP from national accounts in year 2008)
Branko Milanovic
using final08,dta

Step 2. No clear (weighted) relationship between


survey capture and NA consumption
1.2

survey mean/consumption from national account in year 2008

.8

China

.4

.6

USA

.2

India

1000

10000
GDP per capita in ppp

50000

twoway scatter scale2 gdpppp if group==1 & scale2<1.5 [w=totpop], xscale(log) xtitle(GDP per capita in ppp)
xlabel(1000 10000 50000) ytitle(survey mean over NA consumption) title(survey mean/consumption from national
account in year 2008)

Branko Milanovic

The issue of top underestimation

Branko Milanovic

Rising HS/NA gap and top


underestimation
If these two problems are really just one & the
same problem.
Assign the entire positive (NA consumption
HS mean) gap to national top deciles
Use Pareto interpolation to elongate the
distribution
No a priori guarantee that global Gini will
increase
Branko Milanovic

Gini: accounting for missing top


incomes
1988

1993

1998

2003

2008

Surveys
only

72.5

71.8

71.9

71.9

69.6

NAC
instead of
survey
mean

71.5

70.5

70.6

70.7

67.6

NAC with
Pareto

71.8

70.8

71.0

71.1

68.0

NAC with
top-heavy
Pareto

76.3

76.1

77.2

78.1

75.9

Branko Milanovic

The results of various adjustments


Replacing HS survey mean with private
consumption from NA reduces Gini by 1 to 2
points
Elongating such a distribution (that is, without
changing the consumption mean) adds less than
Gini point
But doing the top-heavy adjustment (NA-HS gap
ascribed to top 10% only) adds between 5 and 7
Gini points
It also almost eliminates the decrease in global
Gini between 1988 and 2008
Branko Milanovic

How Global Gini in 2008 changes with different


adjustments
Increase in global Gini with each marginaladjustment
10

Allocate the
gap
proportionally
along each
national income
distributions

Allocate the gap


to top 10% and
add Pareto
elongation
Allocate the gap
proportionately
and add a Pareto
elongation

-2

-4

Branko Milanovic

With full adjustment (allocation to the top 10%


+ Pareto) Gini decline almost fully disappears
80
78

Top-heavy allocation of the


gap + Pareto adjustment

76
74
Survey data only

72
70
68

66
64
1988

1993

1998
Branko Milanovic

2003

2008

D. How has the world changed


between the fall of the Berlin Wall and
the Great Recession

Branko Milanovic

Real income growth at various percentiles of global


income distribution, 1988-2008 (in 2005 PPPs)
Real PPP income change (in percent)

80

X Chinas middle class

$PPP2

70
60

$PPP4.5

$PPP 110

$PPP12

50
40

30
20
Branko Milanovic

10

US lower middle class

0
0

20

40

60

80

100

Percentile of global income distribution


From twenty_years\final\summary_data

Estimated at mean-over-mean

Real income gains (in $PPP) at different percentile of global income


distribution 1988-2008
90

World

Real PPP income change (in percent)

80
70
60
50

Without China

40
30
20
10
0

-10
-20

10

20

30

40

50

60

70

Percentile of global income distribution

80

90

100

Quasi non-anonymous GIC: Average growth rate 1988-2008 for


different percentiles of the 1988 global income distribution

Branko Milanovic

40

60

80

Growth incidence curve (1988-2008) estimated


at percentiles of the income distribution

20

mean growth

Using my_graphs.do

10

20

30
40
50
60
70
80
percentile of global income distribution

Branko Milanovic

90 95 100

Mean-on-mean

Distribution of the global absolute gains in income, 1988-2008:


more than of the gains went to the top 5%
30

27
25

Distribution (in percent) of gain

25
20
15
10

10
5

3 4
3
2 2
2
1
1
0 0 1 1 1

5 4

5
1

5
10
15
20
25
30
35
40
45
50
55
60
65
70
75
80
85
90
95
99
100

Branko Milanovic

ventile/percentile of global income distribution


From summary_data.xls

Annual per capita after-tax income in international dollars

US 2nd decile

5000

Chinese 8th
urban decile

500
1988
From summary_data.xls

1993

1998

2003

2008

2011

Global income distributions in


1988 and 2008
1988

Emerging global middle


class between $3 and $16

100000

50000

30000

10000

6000

3000

1000

300

.2

.4

density

.6

.8

2008

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(0.95 2.5 "1988") text(0.85 3
Branko Milanovic
"2008"))
Or using adding_xlabel.do; always using final_complete7.dta

Increasing gains for the rich with a


widening urban-rural gap
Urban and rural Indonesia

210

urban

6
decile

From key_variables_calcul2.do

200
190

rural

180

rural

Branko Milanovic
1

urban

10

170

200

250

300

350

combined real_growth 1 and 2

400

220

450

Urban and rural China

6
decile

10

E. Issues of justice and politics


1. Citizenship rent
2. Migration
3. Hollowing out of the middle classes

Branko Milanovic

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.
Branko Milanovic

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?
Branko Milanovic

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)
Branko Milanovic

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?
Branko Milanovic

Global Ginis in Real World, Rawlsian World, Convergence


Worldand Shangri-La World (Theil 0; year 2008)
Mean country
incomes

All equal

Different (as
now)

All equal

68
(all country
Ginis=0)

Different (as
now)

30 (all mean
incomes same; all
country Ginis as
now)

Individual incomes
within country

Branko Milanovic

98

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
Branko Milanovic

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
Branko Milanovic

A migrant point of view: trade-off between countrys


mean income and its inequality
How much is one Gini point change worth in terms of mean country
income?

14

12

Percent of income

10

Increase
in Gini

Decrease in Gini

0
1

10

11

12

Ventile

Branko Milanovic
From interyd..\ventil_vs_country.xls

13

14

15

16

17

18

19

20

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
Branko Milanovic

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

Additional slides

Branko Milanovic

H. Global inequality over the long-run


of history

Branko Milanovic

Global income inequality, 1820-2008


100

(Source: Bourguignon-Morrisson and Milanovic; 1990 PPPs )

80

Theil

20

40

60

Gini

Branko Milanovic

1820

1860

1900

1940

1980

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(90 2010 "Theil") text(70 2010 "Gini"))

2020

Shares of global income received by top 10% and bottom 60% of world population
70

Top 10% (L-M data)


60

Percentage share of global income

Top 10% (B-M data)


50

40

30

20

Bottom 60% (B-M data)

10

Bottom 60% (L-M data)


0
1800

1850

1900

1950

Year

Branko Milanovic

2000

2050

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

Branko Milanovic

Composition of global inequality changed: from being


mostly due to class (within-national), today it is mostly
due to location (where people live)
100

Theil 0 index (mean log deviation)

80

Location
60

Location
40

20

Class

Class
Branko Milanovic

1870
Based on Bourguignon-Morrisson (2002), Maddison data, and Milanovic (2005)

2008
From thepast.xls

Very high but decreasing importance of location in global inequality


90

Share of the between component in global Theil (0)

80
L-M data

70

Between component, in percent

B-M data

60
50
40
30

20
10
0
1800
From thepast.xls under c:\history

1850

1900

Year
Branko Milanovic

1950

2000

2050