The last two centuries of global inequality

Last week I wrote a post on ancient inequality, following this paper by Branko Milanovic and others, and promised to follow up by writing on some of their more recent work. This 2009 paper by Branko Milanovic takes a more detailed look at global inequality over the last two centuries.

Before the Industrial Revolution, global inequality was fairly low. Sure, some countries were richer than others and each country had their own privileged elite, but because the economies were largely based on agriculture and to a lesser extent trade and natural resource extraction, differences in average incomes between countries were relatively small (certainly compared with today). Following the Industrial Revolution, the newly industrialised countries rapidly increased in wealth and income, leading to an increase in global inequality that persists to today.

That all seems reasonable. However, Milanovic's paper demonstrates some substantial changes in the structure of global inequality:

...inequality between individuals is much higher today than 200 years ago, but – more dramatically – its composition has totally reversed: from being predominantly driven by within-national inequalities (that is, by what could be called “class” inequality), it is today overwhelmingly determined by the differences in mean country incomes (what could be called “location” or citizenship-based inequality). This latter, “locational”, element was “worth” 15 Gini points in the early 19th century; it is “worth” 60-63 Gini points today. 

In other words, most (65 percent) of the global inequality two centuries ago was within-country (within-country inequality refers to inequality between the citizens within each country, not considering the incomes of citizens in other countries), rather that between-countries (between-country inequality is essentially differences in average incomes between different countries). In contrast, most of global inequality today is between-countries (only about 10-20 percent of overall inequality is within-country). What does that mean? Milanovic suggests that:

The implication of (a) changing composition of global inequality, and (b) stable inequality extraction ratio is that the main “inequality extractors” today are citizens of rich countries rather than individual national elites as was the case 200 years ago.

That's right. It isn't the fat cat capitalists bent on global domination, but the relatively (in global terms) high incomes of the ordinary citizens of rich countries that have been the main drivers of global inequality over time. However, looking forward there is some hope, because of the increasing middle classes in populous poor and middle-income countries. Milanovic notes that, if China (and India) grow faster in absolute terms (not just in terms of growth rates) than rich countries such as the U.S., then global inequality is set to decline. Which means China's current slowdown is likely to be bad news for global inequality.

Milanovic has written a lot more on inequality. I look forward to blogging on that subsequent work sometime in the future.