Friday, 16 October 2015

More evidence of declining global inequality

Last week I wrote the latest of a series of posts on global inequality, based on the work of Branko Milanovic. However, as you might expect Milanovic isn't the only one working on global inequality. In a new paper published in Applied Economics (sorry I don't see an ungated version anywhere), Rati Ram (Illinois State University) adds to the evidence that global inequality has been reducing recently.

In the paper, Ram uses the latest data from the International Comparison Program (ICP), a World Bank programme that produces consistent estimates of GDP across countries every few years. This allows inequality in per capita GDP between countries to be measured accurately (since in-between ICP data years the data quality is not as high). The latest two rounds of the ICP data are for 2005 and 2011 for 140 countries, so that is what Ram uses.

Since Ram calculates inequality based on per capita GDP, this is similar to Milanovic's "Concept 1" or "Concept 2" inequality. He uses three measures of inequality including the Gini coefficient, and two different variants of the Theil Index. As an aside, the Theil Index has recently become my preferred measure of inequality - it doesn't offer the relative simplicity of the Gini coefficient, but it is decomposable into 'within groups' and 'between groups' components, which is a much more useful tool for policy.

Ram finds a huge drop in income inequality between countries from 2005 to 2011. The Gini coefficient falls from 58.0 to 48.4 (or from 55.1 to 49.6 when you exclude China and India). Both Theil indices decrease as well (and by proportionally more). That equates to a nearly 17 percent reduction in between-country inequality (or 10 percent if you exclude China and India) in just six years. If you look back at the figure from Milanovic's 2013 paper (in my post here), you'll see that the declines over that period are similar.

To back up this evidence, Ram also compares GDP growth for six high income countries (Canada, France, Germany, Italy, the UK, and the USA) with that of three large middle income countries (Brazil, China, and India). Aggregate GDP in the three middle income countries was 43.2% of aggregate GDP in the six high income countries in 2005, but this had grown to 82.0% by 2011. Ram labels this a "dramatic rebalancing of global economic power", and I'm inclined to agree. Although the recent slowdowns in China and Brazil will hinder the continuation of this rebalancing.

However, one downside of the paper is that it concentrates only on the between-country component of inequality, and doesn't tell us what is happening to inequality within countries, or inequality between individuals. If economic growth is biased towards the wealthy, then between-country inequality can fall but overall global inequality might stay the same or increase (and depending on how you read the figure from the Milanovic paper, you might conclude either of those things is happening).

So even though the greatest share of global inequality is between countries rather than within countries, and Ram's evidence supports a decline in that component, it might not necessarily mean that global inequality (between individuals) is declining overall. To answer that question, you need more survey data (like the data extensively promoted by the work of new Nobel Prize winner Angus Deaton).

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