Monday, December 30, 2013

Ten facts you should know about global economic inequality

On this blog, I will mostly concern myself with economic inequality in America. But economic inequality is also an important global phenomenon, so from time to time, I will cover the subject from an international perspective, as well. In that spirit, I'd like to share some basic facts about inequality as it exists on the global level.

1. It's very, very difficult to measure global economic inequality.

One vexing feature about global economic inequality is that it is very hard to measure it . There is no single, standard global household survey that asks people about their income. There are individual national surveys that each country conducts, but those can vary in quality, and questions and methodologies are not standardized. There is also the question of what counts as income: how is the income of subsistence farmers recorded, for example? And does health insurance -- a free and universal social benefit in some countries, part of a private employee benefits package in others -- count as income?

Also, people tend to be notoriously bad at recalling the precise amount of their income (this is especially understandable if your income is in a form other than regular wages). Additionally, both the rich and the poor tend to be underrepresented in these surveys, and many surveys lowball rich peoples' income because they cap the maximum amount disclosed (this is known as topcoding). Finally, there are the problems of currency conversion and reconciling all the household surveys from all the different countries.

Two of the most important data sources for economic inequality studies are the Luxembourg Income Studies and the World Bank. Both these sources have developed methods to harmonize international data. The Luxembourg data consists of a relatively small number of wealthy and middle-income countries, but its data is in-depth. The World Bank covers many more countries, but the data available is not as rich.

No dataset is ever perfect, but it's good to remember that where global inequality is concerned, data quality and survey methodology are even more problematic than usual. See this paper for an excellent discussion of the issues involved.

2. The most popular way to measure economic inequality is with an indicator called the Gini coefficient, with bigger numbers indicating more inequality.

The most popular tool developed by researchers to measure economic inequality is an indicator called the Gini coefficient. I will be going into the technical details of the Gini coefficient in a future post. For now, the most important thing to remember is that the Gini is a number between 0 and 1. 0 represents a condition of perfect equality in which every citizen of a country has the same income, and 1 is a condition of perfect inequality in which one person has everything. In the real world, the Gini coefficients for various countries have ranged from the low .20s to the low .70s -- or, as is the conventional way of saying it, from the low 20s to the low 70s.

3.  Latin America is the most unequal region in the world and the Nordic and central European countries are the most egalitarian, while the is U.S. is among the most unequal developed countries in the world.

How do the various countries and regions of the world rank, in terms of inequality? According to inequality expert and World Bank economist Branko Milanovic, the most unequal countries include South Africa and Brazil, with Gini coefficients in the 60s; the most egalitarian nations are the Nordic countries (Denmark, Norway, Sweden) as well as Slovenia and the Czech Republic, which boast Ginis in the mid-20s. Latin America is the most unequal area of the world, with a Gini that's rarely under 50 points. Africa is almost as unequal, followed by Asia. The least unequal groups of nations are the rich countries (Western Europe, North America, Australia and New Zealand) and post-communist countries, with two major exceptions: the United States and Russia. Both the U.S. and Russia have Ginis over 40, as does, by the way, China.

4. Economic inequality at the global level is significantly higher than economic inequality is within any individual country.

Today, the Gini coefficient for the entire world is about 70, a number that is higher than it is in any nation. The richest five percent of people in the world have 37 percent of the world's income, while the poorest 5 percent have a shockingly low 0.2 percent of global income.

5. Global inequality rose rapidly from the Industrial Revolution through the end of World War II, then plateaued at an extremely high level, where it's remained ever since.

If it's difficult to measure global inequality even today, you can imagine what a formidable task it must be to map the trend historically. Nevertheless, attempts have been made. As best as we can determine, with the beginning of the Industrial Revolution, global economic inequality began to rise rapidly. It continued that rise until after World War II. For the past 50 years or so, it's hovered around around the same very high level, changing very little.

6. One hundred years ago, class explained over two-thirds of global inequality, and economic disparities between nations explained less than one-third. Today, those proportions are reversed.

Global inequality can be decomposed into two parts: within-country inequality and between-country inequality. Within-country inequality is the kind of inequality that occurs between people in individual countries -- as Milanovic puts it, class. Between-country inequality is the kind that occurs between citizens of rich and poor nations -- or, as per Milanovic, location. Milanovic says that in the 19th century, class explained more than two-thirds of global inequality and location explained less than one-third. Today, those proportions are reversed.

7. Over the past several decades, inequality within many individual countries has soared, but the level of global inequality has remained basically the same.

Since the 1980s, within-country inequality has soared. Two years ago, OECD reported that "[i]ncome inequality in OECD countries is at its highest level for the past half century. The average income of the richest 10% of the population is about nine times that of the poorest 10% across the OECD, up from seven times 25 years ago."

But in spite of dramatic increases in within-country inequality, overall global inequality has held steady. Milanovic says that's because economic gains in China and India have "just about offset the forces of rising inequality within nations." He argues that if those countries' economies continue to grow,  "lower global inequality could be ahead".

8. Recently, some countries have bucked global trends and enjoyed surprising success in reducing economic inequality.

In the years following 2002, economic inequality saw significant declines in a surprising region of the globe: Latin America. Latin America has long borne the reputation of being perhaps the most unequal place on earth. Yet in the past decade, countries like Mexico, Argentina, and even Brazil have achieved striking declines in inequality. They've accomplished this through energetic redistributionist efforts and government intervention in labor markets and throughout the economy. Successful anti-poverty programs such as Oportunidades in Mexico and Bolsa Familia in Brazil, as well as significantly expanded education access in Brazil, have begun to narrow the enormous gap between rich and poor in those countries. 

9. There are many compelling reasons why you should care about global economic inequality.

Why should you care about global economic inequality? Reasons include, but are hardly limited to, the following: cross-country research has found that high levels of inequality are associated with a lack of social mobility and tend to be incompatible with periods of sustained economic growth. Additionally, economic inequality exacerbates the impact of climate change and contributes to global health epidemics, and it may also increase international tensions and interfere with efforts to reduce global poverty. And yes, there's also the moral and political offensiveness part.

10. Significantly reducing global economic inequality will be a formidable challenge, but it can be done.

What can be done to combat global economic inequality? The fight against global inequality requires action on two fronts. On the one hand, "within-country"-type economic inequality needs to be addressed. That will require an agenda that includes a steeply progressive income tax; robust social welfare and education programs; stronger labor unions and a significantly higher minimum wage; macroeconomic policies that promote a full employment economy; tough, well-targeted government regulations, particularly in the banking and finance sector, and building or rebuilding the government's capacity to enforce them; and political reforms such as the public financing of elections and getting medieval on the lobbyists.

But even if, in the improbable scenario that every single country in the world substantially reduced economic inequality within its borders, global economic inequality would still be extremely high. That's because glaring economic disparities between rich and poor countries would still exist. Significantly alleviating economic inequality within individual countries is exceedingly difficult, but reducing between-country inequality is an even more formidable challenge.

It's not that an agenda to reduce global inequalities of the latter sort is lacking. Items on that agenda would certainly include dramatically increasing financial aid to poor countries and enacting global debt relief, strong international labor standards, fair trade, humane immigration policies, and global anti-poverty, health, and education initiatives. The problem is that existing international institutions aren't performing those tasks particularly well.

International bodies like the IMF, the World Bank, and the WTO have forced a neoliberal economic agenda on developing countries that has often had disastrous consequences. The policies of some of these organizations have marginally improved over the past decade, but much more needs to be done.

An additional problem is that, too often, financial aid to a poor country gets into the hands of that country's rich, corrupt government officials rather than its needy citizens. Some NGOs have done important global anti-poverty work that is effective precisely because it circumvents unscrupulous governments. For example, recent studies of a program that puts cash directly in the hands of poor people, with no strings attached, show promise, but more research is needed to evaluate the final results.

Making a dent in the problem global economic inequality, let alone setting in motion a significant reversal, will be a hugely ambitious undertaking. It is an enormously complex task that requires political action and cooperation at many levels. But there does seem to be, at last, a real sense of urgency about this question. That political momentum, as well as the recent success Latin America has had in addressing the issue, give reason to hope that real progress will be made.

3 comments:

  1. "Finally, there are the problems of currency conversion and reconciling all the household surveys from all the different countries." To understand how tough currency conversion, it is not just a matter of using PPP rather than market rates. For example suppose crabs are really cheap food in a country and a staple. Do you convert the cost by comparing it what crab costs in the USA where crab is a luxury? Or do you compare it to American staples like hamburger or tuna? (Actually that particular choice has been made. PPP creates a staple basket for each nation and compares basket to basket not item to item. But this makes the point of how much subjective choice is, by necessity, involved in PPP currency conversion.)

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  2. That's an excellent example, Typo Boy! I plan to write a future post that will go into many of the complicated issues re: measuring global inequality. Your example illustrates, as you said, exactly how subjective some of parts of the process are.

    I think the main value is that, once you've established a benchmark, you can track it to see how it changes from year to year. The real action is in those changes. Not that the changes can be measured perfectly -- but at least you've got an approximation.

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  3. Very good article. Why don't you list your name as author more prominently? One suggestion -- calculate what a transfer of income would be in $ terms if e.g., the top 5% or 20% were taxed an extra 25% and that money were used to increase employment opportunities for people in the bottom 20-40%. Would it be $5000 per capita, or $10,000? Would it be better to set up coops or loan funds or what? Could you pass laws or referendums for this? Call it a modest proposal.

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