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International inequality (Concepts 1 and 2) Milanovic, “Global inequality and its implications” Lectures 3-5 Definitions Three concepts of inequality defined Concept 1 inequality Concept 2 inequality Concept 3 (global) inequalty Definitions Different types of inequality Individuals in: Countries World The usual within-country distributions (e.g. inequality in the US is greater than in Sweden) Global income distribution: distribution of persons in the world (comparable prices) Countries in: ----- 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? Comparison between the three concepts of inequality Main source of data Unit of observation Welfare concept National currency conversion Within-country distribution (inequality) Concept 1: unweighted inter-national inequality National accounts Country GDP or GNP per capita Concept 2: weighted international inequality National accounts Country (weighted by its population) GDP or GNP per capita Concept 3: “true” world inequality Household surveys Individual Mean per capita disposable income or expenditures Market exchange rate or PPP exchange rate (but different PPP concepts used) Ignored Ignored Included Concept 1 inequality, 1950-2002 Year 19 19 19 19 19 19 19 19 19 19 19 19 19 19 98 96 94 92 90 88 86 84 82 80 78 76 74 72 100 70 68 66 64 62 60 58 56 54 52 50 140 19 19 19 19 19 19 19 19 19 19 19 Number of countries or coverage of world population Inequality between countries coverage: countries and population 160 Number of countries included 120 Coverage of world population (in %) 80 60 40 20 0 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 0.7 Global Inequality 0.6 Gini Index Concept 2 inequality 0.5 Concept 1 inequality 19 50 19 52 19 54 19 56 19 58 19 60 19 62 19 64 19 66 19 68 19 70 19 72 19 74 19 76 19 78 19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 0.4 Year World unweighted World population-weighted World weighted except China According to Concept 1, countries' performances have diverged over the last two decades Unweighted inter-national inequality, 1950 to 2000 0.560 0.540 0.520 0.480 World 0.460 0.440 0.420 0.400 0.380 0.360 19 50 19 52 19 54 19 56 19 58 19 60 19 62 19 64 19 66 19 68 19 70 19 72 19 74 19 76 19 78 19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 Gini coefficient 0.500 Year And it is not only because Africa is falling behind 0.560 0.540 0.520 0.480 World 0.460 0.440 0.420 0.400 World without Africa 0.380 0.360 19 50 19 52 19 54 19 56 19 58 19 60 19 62 19 64 19 66 19 68 19 70 19 72 19 74 19 76 19 78 19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 Gini coefficient 0.500 Year Gini and Theil Index 0.300 Gini and Theil Index Years Latin America, Caribbean 0.000 Years 19 51 19 53 19 55 19 57 19 59 19 61 19 63 19 65 19 67 19 69 19 71 19 73 19 75 19 77 19 79 19 81 19 83 19 85 19 87 19 89 19 91 19 93 19 95 19 97 19 99 19 51 19 53 19 55 19 57 19 59 19 61 19 63 19 65 19 67 19 69 19 71 19 73 19 75 19 77 19 79 19 81 19 83 19 85 19 87 19 89 19 91 19 93 19 95 19 97 19 99 Gini and Theil Index Gini and Theil Index 0.300 19 50 19 52 19 54 19 56 19 58 19 60 19 62 19 64 19 66 19 68 19 70 19 72 19 74 19 76 19 78 19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 19 50 19 52 19 54 19 56 19 58 19 60 19 62 19 64 19 66 19 68 19 70 19 72 19 74 19 76 19 78 19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 Regional convergence and divergence (Gini and Theil index) 0.600 Africa 0.600 Asia 0.500 0.500 0.400 0.400 0.300 0.200 0.200 0.100 0.100 0.000 0.000 Years Eastern Europe and former USSR 0.600 0.600 0.500 0.500 0.400 0.400 0.300 0.200 0.200 0.100 0.100 0.000 Years WENAO 0.600 0.500 Note: Theil Index is always shown by the lower line. The definition of the Theil entropy index is 1 yi yi ln n 0.300 0.200 i 0.100 0.000 19 50 19 52 19 54 19 56 19 58 19 60 19 62 19 64 19 66 19 68 19 70 19 72 19 74 19 76 19 78 19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 Gini and Theil Index 0.400 Years where yi = income of i-th country, μ=mean income, and n=-sample size. Concept 1 inequality in historical perspective: Convergence/divergence during different economic regimes 60 NEOLIBERAL FIRST GLOBALIZATION DEGLOBALIZATI ON WAR DEVELOPMENT AL STATE 50 40 30 Gini 20 10 Theil 0 1820 1870 1890 1900 1913 1929 1938 1952 1960 1978 2000 Relationship between Gini and ln GDI per capita, 2002 Asia Latin America Eastern Europe West Total 80 60 40 20 gini 20 40 60 80 Africa 6 8 10 12 6 8 lngdpppp Graphs by 5 regions 10 12 6 8 10 12 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 y* Ae gt [ s /( n g • 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! 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 wagerates (Williamson), and even during the Interwar 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 19782000 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 Within-country inequalities have been rising during the last two decades (US, UK, China, India) 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 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 1980-2002 Mean Median Percentage negative “Old OECD” 1.9 2.0 17 Middle income countries LLDC 1.0 1.8 33 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%) Winners 13 90 7 26 34 7 93 27 Losers 44 3 0 38 Big time losers (>20%) 9 0 0 9 100 100 100 100 Total 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 Greece (13821) Barbados (13297) Malaysia (9887) Slovak (8595) Egypt (4630) Bulgaria (4313) First to second Portugal (3205) Croatia (3085) Second to third Haiti (2139) Malaysia (2120) Portugal (7993) Puerto Rico (7662) Armenia (5294) Fiji (5156) Third to fourth Nigeria (1080) Madagascar (1031) Guyana (2728) Cote d’Ivoire (2649) Overall upward and downward mobility 1960-78 and 1978-2000 1978-2000 1960-78 Four Worlds 1960 Four Worlds 2003 Four worlds in 1960 and 2003 1960 2003 Number of % of Number of % of countries population countries population First 41 26 27 16 Second 22 12 7 2 Third 39 13 29 37 Fourth 25 49 72 46 Poorer than during Carter Parts of Africa where 2000 GDI per capita is less than in 1980 (350m people ) US GDI per capita in the meantime increased 50% Poorer than during J.F. Kennedy Parts of Africa where 2000 GDI per capita is less than in 1963 (180m people ) 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. 3500 Transition countries: continued output divergence despite policy convergence 4 3000 5 st dev. of gdpppp per capita 6 standard deviation of all EBRD indicators 2500 2 2000 3 standard deviation of GDI per capita 1990 1995 2000 Year... 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") 2005 LAC countries: continued output divergence despite policy convergence 8.00 4 St deviation of the Lora reform indexindicator 7.00 3.9 6.00 3.8 5.00 3.7 4.00 3.6 St. deviation of GDI per capita 3.00 3.5 2.00 3.4 1.00 3.3 0.00 3.2 1985-1988 1988-1991 1992-1994 1995-1997 1998-1999 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 40 Population according to income of country where they live (2000) India, Nigeria 20 Percent 30 China 10 Brazil, Russia WEur, Japan USA 0 Mexico 0 10000 20000 gdp per capita in ppp histogram gdpppp [w=popu] if year==2000 & gdpppp<32000 & Dcont==1, bin(20) percent ylabel(0(10)40) 30000 Inequality between population-weighted countries According to Concept 2, there is convergence among countries… 0.780 0.740 0.700 Theil 0.660 0.620 0.580 Gini 0.540 19 50 19 52 19 54 19 56 19 58 19 60 19 62 19 64 19 66 19 68 19 70 19 72 19 74 19 76 19 78 19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 0.500 19 50 19 52 19 54 19 56 19 58 19 60 19 62 19 64 19 66 19 68 19 70 19 72 19 74 19 76 19 78 19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 Gini coefficient ...or maybe there is not 0.600 World 0.560 World without China 0.520 0.480 World without India and China 0.440 0.400 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)? Whole countries ChIIBus by states + whole countries R/U for China World Bank data -3.3 Maddison data -1.9 -4.0 -2.3 -3.3 -1.9 Concept 2 inequality based on different data and partitions With R/U With states/prov. World Bank data Maddison PWT .4 Distribution of people according to income of country where they live (ln GDPPPP pc; countries/provinces/states/R-U China, 1980-00 1980 .2 0 .1 kdensity lngdp .3 2000 6 7 8 9 10 x kdensity lngdp kdensity lngdp twoway (kdensity lngdp [w=popu] if Dgrand2==1 & year==1980 & lngdp<11) 11 .3 .2 .1 0 kdensitylngdp .4 .5 From one to two poles? Concept 2 inequality in 1955 and 2000 6 7 8 x kdensity lngdp 9 10 11 kdensity lngdp twoway (kdensity lngdp [w=popu] if Dcont==1 & year==1955 & lngdp<11) (kdensity Concept 2 between 1980 and 2000 Contributes to decline Reverses decline (equilibrating factors) (disequilibrating factors) • Inclusion of provinces/states of • Higher (old) income China, India, Brazil, level in China Indonesia, US (even if (Maddison) 1.5 points many within • Inclusion of themselves are rural/urban break up diverging!) 0.5 point of China 0.5 points Result: we shave off half of the Concept 2 decline