Download - International inequality (Concepts 1 and 2)
International inequality (Concepts 1 and 2)
Milanovic, “Global inequality and its implications”
Lectures 3-5
Definitions
Three concepts of inequality definedConcept 1 inequality
Concept 2 inequality
Concept 3 (global) inequalty
DefinitionsDifferent types of inequality
Individuals in:
Countries in:
Countries
The usual within-country distributions (e.g. inequality in the US is greater than in Sweden)
-----
World
Global income distribution: distribution of persons in the world (comparable prices)
Distribution of countries’ GDP per capita (rich vs. poor countries; are the poor countries catching up or not; the convergence literature) (comparable prices)
What world inequality are we talking about?
Concept 1: unweighted
inter-national inequality
Concept 2: weighted inter-
national inequality
Concept 3: “true” world
inequality
Main source of data
National accounts
National accounts
Household surveys
Unit of observation
Country Country
(weighted by its population)
Individual
Welfare concept
GDP or GNP per capita
GDP or GNP per capita
Mean per capita disposable income or
expenditures National currency conversion
Market exchange rate or PPP exchange rate (but different PPP concepts used)
Within-country distribution (inequality)
Ignored Ignored Included
Comparison between the three concepts of inequality
Concept 1 inequality, 1950-2002
Inequality between countries coverage: countries and
population
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Number of countries included
Coverage of world population (in %)
About 140 countries included; about 6200 country/year GDPs
almost 100 percent of world population and world GDP (in current dollars)
current countries projected backward (NEW)
SIMA World Bank data used to get benchmark 1995 $PPP GDP per capita; then these GDP per capita projected backward and forward using countries’ real growth rates (78% of data from WB sources; others mostly from national SYs; some from PennWorld Tables, UN sources)
Inequality, 1950-2002:The mother of all inequality disputes
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Year
Gin
i Ind
ex
World unweighted World population-weighted World weighted except China
Global Inequality
Concept 1 inequality
Concept 2 inequality
According to Concept 1, countries' performances have diverged over the last two decades
Unweighted inter-national inequality, 1950 to 2000
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0.380
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Year
Gin
i co
eff
icie
nt
World
And it is not only because Africa is falling behind
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Year
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i co
eff
icie
nt
World
World without Africa
Regional convergence and divergence (Gini and Theil index)
Africa Asia
Latin America, Caribbean Eastern Europe and former USSR
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Years
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i and
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il In
dex
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Gin
i and
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il In
dex
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Gin
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d T
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l In
dex
Note: Theil Index is always shown by the lower line. The definition of the Theil entropy index is
where yi = income of i-th country,
μ=mean income, and n=-sample size.
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0.100
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Years
Gin
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il In
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WENAO
yiyi
n i
ln1
Concept 1 inequality in historical perspective: Convergence/divergence during different
economic regimes
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1820 1870 1890 1900 1913 1929 1938 1952 1960 1978 2000
Gini
Theil
FIRST GLOBALIZATION DEGLOBALIZATION
WAR DEVELOPMENTAL STATE
NEOLIBERAL
Relationship between Gini and ln GDI per capita, 2002
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40
60
80
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40
60
80
6 8 10 12 6 8 10 12 6 8 10 12
Africa Asia Latin America
Eastern Europe West Total
gin
i
lngdppppGraphs by 5 regions
Convergence and growth theory
Convergence and divergence
• Unconditional or σ convergence (original studies by Baumol for OECD countries based on Maddison data). All countries end up with the same steady-state equilibirum level (NCGT).
• Slower growth of richer countries as MPK falls and they get closer to technological frontier (technology is freely available to all)
• Conditional or β convergence (Barro with human capital only). Growth regressions; based also on endogeneous (“new”) growth theory; each country ends with its own steady-state equilibrium
• Endogeneous growth in response increasing returns to scale (no ↓ MPs), monopolistic competition (no free competition), and no free diffusion of technology (all key neoclassical assumptions abandoned), role of policies and institutions important
• Noted: Lucas paradox: capital flows from rich to rich countries; mean country incomes diverge
• But β convergence compatible with greater dispersal of growth rates and incomes
• Often meaningless: if Ethiopia had education level and institutions of the US, it would grow faster than the US! (These factors are concommitant with high income, not independent of it.)
State steady income
• Depends on A = initial technology but also resource enbdowment, clisate, institutions etc, g = technological progress, s = savings (investment) rate, n = population or labor growth rate, g = rate of technological progress, δ = depreciation, α = share of labor in total output
• In unconditional convergence, all economies the same, β<0 even if no other RHS variable
• Or economies differ only if one or more of these parameters differ. Some of the parameters to be included on the RHS. And find out if β is negative then.
• But do not forget about A!
gnsAey gt /([*
Panel approach : heterogeneity of countries
• Allow for country-fixed effect (contained in A); large differences in technology (A): variables like institutions, climate etc. which are in countrty fixed effect influence income level (not sufficient to use K, L)
• Instrument for A; since A is “kitchen-sink” variable can be instrumented by almost any variable
• If both A and g differ, no convergence • If parameter heterogeneity (Pasaran & Binder);
no sense to talk about crss-country regressions which constrain the parameters (even in panelds)
The bottom line
• σ convergence among rich countries since WW2 and possibly earlier; at least in terms of wage-rates (Williamson), and even during the Inter-war years (Milanovic, Restat)
• σ divergence for the world recently, but also historically, since the Industrial revolution
• σ or unconditional divergence is the same as increase in Concept 1 inequality (Gini instead of st. deviation of logs)
• The world of increasing returns to scale PF is a world of high income and very high inequality (examples of Sylicon valley, soccer)
The two periods, 1960-1978 and 1978-
2000
Focus first on inequality between countries: Discontinuity in development trends around
1978-80• The watershed years (Bairoch)
• Tripling of oil prices
• Increase in real interest rates (from –1% to +5% in the USA and the world)
• Debt crisis
• China’s responsibility system introduced
• Latin American begins its “lost decade”, E. Europe/USSR “stagnate”
But also discontinuity in inequality trends
Inequalities between countries are rising since 1978
Population weighted inequality between countries decreasing since 1978 thanks to growth in China and India (Caveat: acc. to Maddison Concept 2 inequality is almost stable)
Inequality among people in the world is very high (Gini between 62 and 66) but its direction of change is not clear
Within-country inequalities have been rising during the last two decades (US, UK, China, India)
The outcome:
• Middle income countries declined (Latin America, EEurope/former USSR)
• China and India pulled ahead
• Africa’s position deteriorated further
• Developed world pulled ahead
• World growth rate decreased by about 1 % (compared to the 1960-78 period)
Different way to look at world growth rates
1960-1980 1980-2000
Unweighted (each country counts the same)
2.9 0.8
Percentage negative 23 33
China 2.7 8.2
India 1.2 3.6
Population-weighted 3.0 3.2
World 2.6 1.6
Annual per capita growth rates 1980-2002Mean Median Percentage
negative
“Old OECD” 1.9 2.0 17
Middle income countries
1.0 1.8 33
LLDC 0.1 0.8 43
Growth over 1980-2002 period as function of initial (1980) income
Distribution of population (in %; year 2000) according to how country did over 1980-2000
Africa Asia WENAO LLDC
Big time winners (>58%)
13 90 7 26
Winners 34 7 93 27
Losers 44 3 0 38
Big time losers (>20%)
9 0 0 9
Total 100 100 100 100
The Four Worlds
Define four worlds:
• First World: The West and its offshoots• Take the poorest country of the First World
(e.g. Portugal)• Second world (the contenders): all those
less than 1/3 poorer than Portugal.• Third world: all those 1/3 and 2/3 of the
poorest rich country.• Fourth world: more than 2/3 below
Portugal.
The border countries and their GDP per capita levels (in $PPP, 1995 prices)
1960 1978 2000
First tosecond
Portugal (3205)Croatia (3085)
Portugal (7993)Puerto Rico(7662)
Greece (13821)Barbados(13297)
Second tothird
Haiti (2139)Malaysia (2120)
Armenia (5294)Fiji (5156)
Malaysia (9887)Slovak (8595)
Third tofourth
Nigeria (1080)Madagascar(1031)
Guyana (2728)Cote d’Ivoire(2649)
Egypt (4630)Bulgaria (4313)
Overall upward and downward mobility 1960-78 and 1978-2000
1960-78
1978-2000
0 5 10 15 20 25 30 35 40 45
1
2
Number of countries
Upwardly mobile
Downwardly mobile
Four Worlds 1960
Four Worlds 2003
Four worlds in 1960 and 20031960 2003
Number of countries
% of population
Number of countries
% of population
First 41 26 27 16
Second 22 12 7 2
Third 39 13 29 37
Fourth 25 49 72 46
Parts of Africa where 2000 GDI per capita is less than in 1980 (350m people )
Poorer than during Carter
US GDI per capita in the meantime increased 50%
Parts of Africa where 2000 GDI per capita is less than in 1963 (180m people )
Poorer than during J.F. Kennedy
US GDI per capita in the meantime doubled
Why Concept 1 inequality matters
• Are poor countries catching up as we would expect from theory?
• Are similar policies producing the same effects or not? (Rodrik: convergence of policies, divergence of outcomes). Why?
• Migration issues• Countries are not only interchangeable
individuals (random assortments of individuals); they are cultures. Divergence in outcomes is elimination of some cultures. Perhaps it’s good, perhaps not.
Transition countries: continued output divergence despite policy convergence
twoway (line EBRD_sd year) (line gdpppp_sd year, yaxis(2)), legend(off) text(6.2 1997 "standard deviation of all > EBRD indicators") text(3.5 2000 "standard deviation of GDI per capita")
standard deviation of all EBRD indicators
standard deviation of GDI per capita
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st d
ev. o
f gdp
ppp
per
capi
ta
23
45
6st
dev
of a
ll E
BR
D in
dica
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1990 1995 2000 2005Year...
LAC countries: continued output divergence despite policy convergence
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1985-1988 1988-1991 1992-1994 1995-1997 1998-1999
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4
St deviation of the Lora reform indexindicator
St. deviation of GDI per capita
The key borders today
• First to fourth world: Greece vs. Macedonia and Albania; Spain vs. Morocco (25km)
• First to third world: US vs. Mexico;
Germany vs. Poland; Austria vs. Hungary
In 1960, the only key borders were Argentina and Uruguay (first) vs. Brazil, Paraguay and Bolivia (third world), and Australia (first) vs. Indonesia (fourth)
Approximate % of foreign workers in labor force
Ratio in per capita GDIs (in PPP terms)
Greece (Albanians)
7.5 4 to 1
Spain (Moroccans)
12.0 4.5 to 1
United States (Mexicans)
>10.0 4.3 to 1
Austria (former Yugoslavs)
10.0 2.7 to 1
Malaysia
(Indonesians)
>10.0 5.3 to 1
The two periods of international growth
Period Mean (unweighted) incomes: “Rest against West”
Regional homogeneity
1960-1978 Rest catching up Strong divergence in Asia & Africa; divergence in EEurope/FSU; mild convergence in WENAO and LAC
1978-2000 All falling behind except Asia
Continued strong divergence in Africa, joined by EEurope; mild divergence in Asia & LAC; continued convergence in WENAO only
Concept 2 inequality,
1950-2000
Moving to Concept 2: its relevance and irrelevance
• Once we have Concepts 1 & 3, Concept 2 is redundant.
• But we have imperfect grasp of Concept 3 inequality => Concept 2 provides a check on “true” inequality (its lower bound)
• We use it to approximate “true” inequality. Think, at the limit, of each individual being a country
Population according to income of country where they live (2000)0
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Perc
ent
0 10000 20000 30000gdp per capita in ppp
China
India, Nigeria
WEur, Japan USA
Brazil, Russia
Mexico
histogram gdpppp [w=popu] if year==2000 & gdpppp<32000 & Dcont==1, bin(20) percent ylabel(0(10)40)
Inequality between population-weighted countries
0.500
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2000
Theil
Gini
According to Concept 2, there is convergence among countries…
...or maybe there is not
0.400
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0.480
0.520
0.560
0.600
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Gin
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World without India and China
World without China
World
Alternative Concept 2 calculations
• Alternative growth rates for China (official-World Bank, Maddison, Penn World Tables)
• Breaking China, India, US, Indonesia and Brazil into states/provinces (but redistribution within nations)
• Breaking China into rural and urban parts (Kanbur-Zhang data set)
• What PPP to use (Geary-Khamis, EKS, Afriat)
Implied China’s GDP per capita in different years According to different sources
PWT 6.1 Maddison World Bank
1952 568 627 262
1960 662 785 497
1966 773 879 534
1978 899 1142 754
1988 1703 2119 1676
1999 3319 3803 3867
2000 3642 na 4144
How much has Concept 2 inequality changed (Gini points; 1985-2000)?
World Bankdata
Maddisondata
Wholecountries
-3.3 -1.9
ChIIBus bystates + wholecountries
-4.0 -2.3
R/U for China -3.3 -1.9
Concept 2 inequality based on different data and partitions
0.1
.2.3
.4.5
kde
nsity ln
gdp
6 7 8 9 1 0 1 1x
k d e n s i t y ln g d p k d e n s i t y ln g d p
World Bank data
Maddison
PWT
With states/prov.
With R/U
Distribution of people according to income of country where they live (ln GDPPPP pc;
countries/provinces/states/R-U China, 1980-00
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.2.3
.4kd
ensi
ty ln
gdp
6 7 8 9 10 11x
kdensity lngdp kdensity lngdp
twoway (kdensity lngdp [w=popu] if Dgrand2==1 & year==1980 & lngdp<11)
20001980
From one to two poles? Concept 2 inequality in 1955
and 20000
.1.2
.3.4
.5kd
en
sity
lng
dp
6 7 8 9 1 0 1 1x
k d e n s i t y ln g d p k d e n s i t y ln g d p
twoway (kdensity lngdp [w=popu] if Dcont==1 & year==1955 & lngdp<11) (kdensity
Concept 2 between 1980 and 2000
Contributes to decline (equilibrating factors)
• Inclusion of provinces/states of China, India, Brazil, Indonesia, US (even if many within themselves are diverging!) 0.5 point
Reverses decline (disequilibrating factors)
• Higher (old) income level in China (Maddison) 1.5 points
• Inclusion of rural/urban break up of China 0.5 points
Result: we shave off half of the Concept 2 decline