Trends in global income inequality and their political

implications

Branko MilanovicLIS Center; Graduate School City University of New York

Talk at the Stockholm School of Economics, September 1, 2014

Branko Milanovic

A. National inequalities mostly increased

Branko Milanovic

Ginis in 1988 and twenty years later

1988 2008 Change

Average Gini 36.0 38.5 +2.5

Pop-weighted Gini

33.9 37.3 +3.4

GDP-weightedGini

32.2 36.4 +4.2

Countries with higher Ginis (38)

33.7 38.5 +4.8

Countries with lower Ginis (20)

40.5 37.7 -2.7

From final-complete3.dta and key_variables_calcul2.doBranko Milanovic

Ginis in 1988 and 2008

From key_variables_calcul3.do

Branko Milanovic

BOL

NGA

HND

UGA

COL

MRT

GTM

CIV

IND-U

BGD

IND-R

CHN-R

IDN-U

IDN-R

VEN

PAK

PHL

BRA

ECUPAN

PER

PRY

SLV

KGZ

TJK

MEX

LKA

ROU

DOM

MAR

ARM EGY

CRI

MDACHN-U

THATUR

MKD

JOR

ARG

AZE

MYS

CHL

URY

BGR SRB

ISR

POL

LVA

RUS

LTU

UKR

BIH

HUN

SVK

EST

PRTKOR

GRC

CZE

SGP

ESP

HRV

JPN ITA

CYP

USA

CAN

BELIRL

SVN

TWN

FRA

FIN

DEU

SWE

GBR

NLDAUT

DNKNOR

20

30

40

50

60

70

Gin

i in

200

8

20 30 40 50 60Gini in 1988

Ginis in 1988 and 2008 (population-weighted countries)

From key_variables_calcul3.do

Branko Milanovic

RUS

IND-U

MEX

BRA

NGA

IND-R

USA

CHN-U

CHN-R

20

30

40

50

60

Gin

i in

200

8

20 30 40 50 60Gini in 1988

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

38,0

40,0

42,0

44,0

46,0

48,0

50,0

1929 1939 1949 1959 1969 1979 1989 1999 2009

Inequality (Gini) in the USA 1929-2009(gross income across households)

From ydisrt/us_and_uk.xls

Kuznets and Piketty “frames”

0

10

20

30

40

50

60

70

1600 1650 1700 1750 1800 1850 1900 1950 2000 2050

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

England/UK

USA

From uk_and_usa.xls

9

Contemporary examples of Brazil and China: moving on the descending portion of the Kuznets

curveChina, 1967-2007

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

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

10

Brazil 1960-2010

40

50

60

Gin

i

7.5 8 8.5 9 9.5ln GDP per capita

updated Giniall Fitted values

40

50

60

Gin

i

5 6 7 8 9ln GDP per capita

updated Giniall lowess Giniall lngdpppp

B. Between national inequalities remained very high even if

decreasing

Branko Milanovic

From defines.do in interyd

Distribution of people by income of the country where they live: emptiness in the middle (year 2013; 2011 PPPs)

India, Indonesia

Brazil, Mexico, RussiaW.Europe, Japan USA

China

01

02

03

0

Pe

rcen

t

0 10000 20000 30000 40000 50000GDP per capita in 2005 PPP

Different countries and income classes in global income distribution in 2008

From calcu08.dta

USA

India

Brazil

China

Russia

11

02

03

04

05

06

07

08

09

01

00

pe

rce

ntile

of w

orl

d in

co

me

dis

trib

utio

n

1 20 40 60 80 100country percentile

Branko Milanovic

Denmark

Mozambique

Mali

Tanzania

Uganda1

10

20

30

40

50

60

70

80

90

100

perc

entile

of w

orl

d in

com

e d

istr

ibutio

n

1 5 10 15 20country ventile

Branko Milanovic

0

10

20

30

40

50

60

70

80

USA Germany France Japan Russia SouthAfrica

Brazil China Morocco Egypt India Indonesia

Percentage of country's population that belongs to the global top decile

C. Global inequality is the product of within- and between-county

inequalities How did it change in the last 25 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

Global inequality 1950-2012: three concepts

Branko Milanovic

Concept 2

Concept 1

Concept 3

.45

.55

.65

.75

Gin

i co

eff

icie

nt

1950 1960 1970 1980 1990 2000 2010year

Divergence begins

Divergence ends

China moves in

52

The effect of the new PPPs on countries’ GDP per capita (compared to the US level)

Branko Milanovic

EGYPAK

ETH

LAO

BGD

IND

VNM

UGAKHM

TZA

MDG

NPL

GMB

BDI

LKA

YEM

SLEBTN

TJK

GINBLR

KGZKEN

NIC

THA

IDN

MRT

PHL

JOR

DZA

TUNMKD

MNG

BOLUKR

RWA

MLI

ALBBFA

BEN

MAR

TGO

AZE

SDNSDN

GHA

GTM

GNB

NER

BGR

MDA

HTI MYSNGA

CMR

CIV

MWI

ZMBSAU

OMN

SEN ARMSLV SRB

DOMGEO MNE

TWN

BIH

LBR

HND ECU

DJI

TCD

PRYSWZLSO

CAF

CHN

KAZ

PAN

BWA

MOZ

PER MUS

SUR

BRN

MAC

BLZ

FJI

MDV

COM

TUR

RUS

CPV

COG

TTOHUN

POLMEX

KWT

GNQ

COLJAM

LTU

VEN

NAM

ZAF

QAT

GABCRI

LVA

ARE

HKGSVK

SGP

HRV

CHLAGO

EST

CZEKOR

MLTURY

SVNPRT

BRA

CYP

BHS

GRCESP USAITA

DEUISR

GBR

IRLISL

AUTNLDBEL

NZLFRA

CAN

LUX

FIN

JPNSWE

DNKAUS

NORCHE

-50

05

01

00

150

gain

com

pare

d t

o 2

005

ipc--

norm

aliz

ed b

y th

e u

s leve

l

50000 100000150000gdppc in 2011ppp

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

The effect of new PPPsCountry GDP per capita

increase (in %)GDP per capita

increase population-weighted (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 3 2

Concept 1 and 2 international inequality with 2011 PPP values

Branko Milanovic

Without India and China

Without China

all countries

.45

.5.5

5.6

.65

Gin

i coe

ffic

ien

t in

pe

rcen

t

1940 1960 1980 2000 2020year

47

defiine.do in interyd

Population coverage

1988 1993 1998 2002 2005 2008 2011

Africa 48 76 67 77 78 78 60

Asia 93 95 94 96 94 98 86

E.Europe 99 95 100 97 93 92 76

LAC 87 92 93 96 96 97 97

WENAO 92 95 97 99 99 97 90

World 87 92 92 94 93 94 83

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

Large countries and the world, from 1950-60s to today

Branko Milanovic

China

United States

Brazil

Russia

World

20

30

40

50

60

70

Gin

i coe

ffic

ien

t

1000 5000 10000 40000GDP per capita in PPP dollars

c:\branko\glob_talks_and_opeds\opeds_interviews\finance_development\figures\figure2Using gdppppreg5.dta

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)

From twenty_years\final\summary_data

X“US lower middle class”

X “China’s middle class”

Branko Milanovic

$PPP2

$PPP4.5 $PPP12

$PPP 110

Estimated at mean-over-mean

0

10

20

30

40

50

60

70

80

0 20 40 60 80 100

Re

al P

PP

inco

me

ch

ange

(in

pe

rce

nt)

Percentile of global income distribution

-20

-10

0

10

20

30

40

50

60

70

80

90

0 10 20 30 40 50 60 70 80 90 100

Re

al P

PP

inco

me

ch

ange

(in

pe

rce

nt)

Percentile of global income distribution

Real income gains (in $PPP) at different percentile of global income distribution 1988-2008

Without China

World

Quasi non-anonymous GIC: Average growth rate 1988-2008 for different percentiles of the 1988 global income distribution

Branko Milanovic

Growth incidence curve (1988-2008) estimated at percentiles of the income distribution

Branko Milanovic

mean growth

02

04

06

08

0

cu

mula

tive

re

al g

row

th r

ate

betw

een

198

8 a

nd 2

008

2 10 20 30 40 50 60 70 80 90 95 100percentile of global income distribution

Using my_graphs.do Mean-on-mean

0 0 1 1 1 1 1 2 2 2 3 3 45 4

13

5

10

2527

0

5

10

15

20

25

305

10

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50

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90

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99

10

0

Dis

trib

uti

on

(in

pe

rce

nt)

of

gain

ventile/percentile of global income distribution

Distribution of the global absolute gains in income, 1988-2008: more than ½ of the gains went to the top 5%

From summary_data.xls

Branko Milanovic

Branko Milanovic

From my_graphs.do

MYS

PAK

IDN-RIDN-R

IDN-UIDN-U

THA

CHN-R

CHN-RCHN-U

CHN-U

-.6

01

2

real gro

wth

1988-2

008

450 500 550 600real pc income in 1988

growth>50% Asia highlighted

BGR BGR BGR BGRJPN BGR BGRLVA LVAROU LVAROU LVAJPNLVA LVA

JPNLVAROU JPNAUT

AUTSVKSVK AUTSVK SVKDEUDEU SVKDEUGRC DEUESTCZE GRCCZE GRCCZE GRCCZE DNKEST DNKGRCCZEPOL DNK CZEESTPOLUSA USAFIN USACYP

VEN

JORPRY

URY ARGARG URYARGURY

ARGTUR

-.6

01

2

real gro

wth

1988-2

008

5000 6000 7000 8000 9000 10000real pc income in 1988

growth<25% mature econ highlighted

Best and worst performing parts of the 1988 distribution

500

5000

1988 1993 1998 2003 2008 2011

An

nu

al p

er

cap

ita

afte

r-ta

x in

com

e in

in

tern

atio

nal

do

llars

US 2nd decile

Chinese 8th urban decile

From summary_data.xls

Global income distributions in 1988 and 2008

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 "2008"))Or using adding_xlabel.do; always using final_complete7.dta

1988

20080

.2.4

.6.8

1

den

sity

300

100

0

300

0

600

0

100

00

300

00

500

00

100

00

0

log of annual PPP real income

Emerging global “middle class” between $3 and $16

Branko Milanovic

Increasing gains for the rich with a widening urban-rural gap

Urban and rural China Urban and rural Indonesia

170

180

190

200

210

220

co

mbin

ed r

ea

l_g

row

th 1

and

2

1 2 3 4 5 6 7 8 9 10decile

200

250

300

350

400

450

co

mbin

ed r

ea

l_g

row

th 1

and

2

1 2 3 4 5 6 7 8 9 10decile

From key_variables_calcul2.do

Branko Milanovic

urban

rural

urban

rural

E. Issues of justice and politics

1. Citizenship rent2. 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

All equal Different (as

now)

All equal

Different (as

now)

Mean country incomes

Individual incomes within country

Global Ginis in Real World, Rawlsian World, Convergence World…and Shangri-La World (Theil 0; year 2008)

98

68 (all country Ginis=0)

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

0

Branko Milanovic

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

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

Theil

Gini

02

04

06

08

01

00

1820 1860 1900 1940 1980 2020year

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"))

Branko Milanovic

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; between-national)

Based on Bourguignon-Morrisson (2002), Maddison data, and Milanovic (2005) From thepast.xls

0

20

40

60

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1870 2000

Th

eil

0 in

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me

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Class

Location

Location

ClassBranko Milanovic