A global take on income inequality

Most of us think about inequality within the borders of countries. But why shall we do so? Another very interesting perspective is offered when we go beyond those arbitrary limits and explore inequality across all individuals in the world. Moreover, as the world gets more and more integrated, this dimension of inequality becomes increasingly relevant. This perspective is the one I got the opportunity to participate in at Harvard's 2015 IDC conference with Branko Milanovic. I will try to summarize those ideas here.

There are many ways to look at global inequality. The simplest forms refer to comparing GDP per capita between countries. This alternative abstracts from the fact that Liechtenstein is almost 35 thousand times smaller than China. Weighting by population may be a solution for that but even then it would miss the fact that within each of those countries there is also inequality. Most people do not earn exactly their own countries average income, so we should also include this. A few people in China earn a lot, while lots of them make a lot less than China's average income. However, taking this into account requires having household surveys in at least 120 countries to cover at least 90% of the world's population and 95% of world's income. Fortunately, this has been explored by Branko Milanovic and for the years after 1980 we can get a decent estimate of this global inequality. A typical way to look at inequality is through the Gini coefficient, where a higher Gini means more inequality. As Figure 1 shows, global inequality is much higher than even the one from within very unequal countries like Brazil. (All figures adjust for different levels of prices between countries.)

Figure 1: Global Gini compared to selected countries Ginis.

To get a sense of what a Gini of about 0.7 means we can picture splitting the world's income in two: the first half is kept by 8% of the world, while the other half is given to the bottom 92%. A serious level of inequality. And this is true even when Africa is under-represented in the sample. 

How has globalization affected global inequality? Figure 2 explores this by showing the percentage change in real income for each percentile of the global income distribution, between 1988 and 2008. The largest gains are observed at the top 1% as well as among emerging middle class. As expected, 200 million Chinese, 90 million Indians and 30 million people each from Indonesia, Brazil and Egypt are found between the 50th and 60th percentiles, the largest winners. The Top 1% includes 60 million people, mostly populated by the top 12% Americans and between 3 and 6% of other major OECD countries. The biggest losers are among the bottom 5 per cent, mainly African countries, and those between the 75th and 90th percentiles, including mainly former communist countries and Latin America. It's important to remark that this does not mean that the poorest have remained stuck at the bottom. Since this analysis does not follow people over time, it is possible that the poorest in 1988 were not the poorest in 2008. That has to do with intergenerational mobility which is out of the scope of this research. Nevertheless, this shows that the very bottom has not moved much, while the middle and very top have moved up.

Figure 2: Change in real income between 1988 and 2008, by percentile of global income distribution.

In the 19th century, global inequality appears to have had a lot to do with people's class within their countries. The country itself didn't matter much. Nowadays, what matters the most is in which country you were born. The current consequence of this is clear in Figure 3, where the population of each country is divided in groups of 5 per cent (ventiles) and their income is placed within the world's percentile distribution. For example, the top panel of Figure 3 shows that the poorest 5% in the US are around the 60th percentile in the worldwide distribution (among the world's top 40%). It's important to remark that this may be considered the poverty threshold in the US. For comparison with other countries, the dashed line shows their position. The top 5% of Indians barely reach this level. So the top 5% of Indians are almost at the same level as the bottom 5% of Americans. (Obviously there are very rich Indians, but the top 5% of Indians includes 60 million people.) Focusing on the second panel, the bottom 5% in Italy is similar to the one from the US. However, Germany's poorest are shown to be a lot better off. Both Argentina and Brazil mimic the worlds distribution of income. The poorest Argentinians/ Brazilians are among the worldwide poorest, their middle classes are between the 70th and 80th percentiles and their high classes are among the worldwide top.

Figures 3: Global inequality in US and Italy vs other countries.

"Location, location, location" is usually said to remind people that location is the most important factor for the price of a house or the revenue of a shop. But location, the place people are born in, also seems key for income levels across the world. What are the advantages provided by a better place? They probably include education, health care, financial systems and inherited wealth. Regardless of your political views, countries usually try to limit inequalities within their frontiers (through progressive taxation, subsidized education, etc) while most of the differences are actually reflected across those borders. Maybe open borders is the solution to much of the inequality we see around the world...

Based on an article by Branko Milanovic. Subjective political comments are my own.