Transcript within-country inequality - Globalization: Social & Geographic

Economic inequality
 Refers to disparities in the distribution of
wealth and income
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Economic inequality in the world
can be measured in different ways
 within-country inequality
 between-country inequality
 individual-level inequality

Wolf et al. call this “global economic
inequality"
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Types of income inequality
 within-country inequality: disparities in the
distribution of income within a country
 between-country inequality: disparities in
the distribution of income between countries
 individual-level or “global” inequality:
disparities in the distribution of income among
individuals worldwide
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There are different income inequality
metrics
 Range
 Ratio
 Gini coefficient
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Range
 Simply the difference between the highest
and lowest observations of income (or
wealth)

Reveals absolute gaps in income (or wealth)
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Ratio
 the ratio of the income of 2 different groups, generally
higher over lower
 compares 2 parts of the income distribution, rather
than the distribution as a whole


equality between these parts corresponds to 1:1, while
the more unequal the parts, the greater the ratio
can be calculated as "income share" – what
percentage of national income a subpopulation
accounts for
 e.g., in 2007, the top 10% (decile) accrued 49.7% of
all income in the US, considerably higher than 10%,
which would hold in a condition of income equality
(Saez 2009)
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Gini coefficient
 a measure of income inequality within a population,
ranging from 0 for perfect equality (where e/o has
same income), to 1 for perfect inequality (where one
person has all the income)



population can be a country, a region, the world, etc.
can be used to compare populations or to study
changes in a single population over time
It is defined as the area between the “Lorenz Curve” and the
diagonal, divided by the total area under the diagonal
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Differences in national income
inequality by national Gini coefficients
Ranges from approx. 0.23 (Sweden) to 0.70 (Namibia)
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Incensed about Inequality
Martin Wolf, Ch. 20, pp. 183-189 (Excerpted from
Wolf, “Incensed about Inequality,” in Why
Globalization Works, Yale, 2004)
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Globalization has NOT increased
inequality – not “global inequality”
 Economic liberalization and int’l economic
integration has not increased global inequality
 Global inequality – understood as inequality
among individuals – has declined, and so has
global poverty
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Still, between-country and withincountry inequality is rising
 Absolute & proportional gaps in living
standards between world’s richest and
poorest countries are rising
 Inequality within the world’s big countries is
rising, e.g., the US
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Income inequality in the US
(US Census Bureau data)
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In India, two revolutions were critical for
growth since the mid-1970s
 the green revolution increased agricultural
productivity, with introduction of pesticides,
high-yield grains and better management
during 1960s & 1970s
 economic liberalization beginning in1980s
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Economic liberalization has led to
partial “convergence”
 economic liberalization beginning in1980s
has had greatest impact on China & India

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China & India have almost 2/5s of world pop’n
China has more people than Latin America &
sub-Saharan Africa combined
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GL, by increasing economic growth,
has reduced inequality and poverty
1)
2)
3)
4)
5)
The # of people in extreme poverty fell from 1.18
billion in 1987 to 1.17 bil. in 1999
Enormous declines in the # of people in extreme
poverty have occurred in East Asia
The # of people in extreme poverty fell very
modestly in south Asia (1990-1999), while it rose
sharply in eastern Europe and central Asia and
above all, sub-Saharan Africa
The regional incidence of poverty fell dramatically in
east Asia
The regional incidence of poverty also fell sharply in
south Asia
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"Globalization, Growth, and Poverty"
(World Bank, 2002)
 73 developing countries were divided into 2
groups

more globalized: the third that had increased
ratios of trade to GDP since 1980

less globalized: 2/3s of countries with
declining in trade/GDP ratios
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"Globalization, Growth, and Poverty" :
Findings
 Average per capita income in globalizers
(more globalized countries) rose by 67% per
year 1980-1997

Note: 75% of globalizer group's combined
population comes from India and China
 Average per capita income in less globalized
rose only about 10% in same period
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"Globalization, Growth, and Poverty" :
Implications
 Results challenge idea that GL necessarily
makes the rich richer, the poor poorer
(as predicted by dependency theory, for example)
 Success among globalizers did NOT require
the full-range of so-called neoliberal policies
 But successful countries all share a move
towards a market economy, in which private
property rights, free enterprise and
competition took the place of state
ownership, planning and protection
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Is Globalization Reducing
Poverty and Inequality?
Wade, Ch. 21, pp. 190-196 (Excerpted from
Wade, “Is Globalization Reducing Poverty and
Inequality?,” World Development 32:4, 2004)
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Two perspectives on globalization:
neoliberal & anti-neoliberal
 Neoliberal: sees GL as confirmation that
open, liberalized economies are more
prosperous
 Anti-neoliberal: claims GL—in current
neoliberal form—has caused in rising world
poverty & inequality
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Two sets of policy prescriptions
 Neoliberal
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GL  flattening, “leveling of the playing field”
Policy prescription: more global economic
integration (freer trade, more FDI, more capital
market liberalization)
 Anti-neoliberal
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GL  spiking inequality
Policy prescription: less global economic
integration (limits on market forces)
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GL  divergence among regions
 Period of accelerated globalization (1980 on)
shows positive world per capita growth but
also a wide divergence of economic
performance between developing regions


GDP of developing countries as a group
(population-weighted) grew faster than that of
high-income countries
But regional variation within Global South is
large
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Regional inequality
 What’s most striking in data is not
overall growth trends, but the size of
gaps
 testimony to the failure of the poorest
countries to "catch up"
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World Bank's poverty figures contain a
large margin of error
1) Poverty headcount is very sensitive to the precise
level of the international poverty lines, which change
2) Poverty headcount is also sensitive to the reliability
of household surveys of income and expenditure,
which vary in quality
3) China and India, 2 most important countries for the
overall trend, have PPP-adjusted income figures
based on even more guesswork, or "guesstimates“
4) 1990s change in data collection methodology makes
comparisons over time unreliable
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Still, it's plausible that the proportion of the
world population in extreme poverty has fallen
 Despite the problems with income figures, we
know about trends in other variables, which
all show improvement:

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
life expectancy
height
other nonincome measures
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Economic inequality & poverty?
 World poverty could decline while world
inequality rises
 There’s lots of disagreement about inequality

the trends depend on what combination of
measures and countries we use
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Prop. 1. World income distribution has become rapidly more
unequal, when incomes are measured at market exchange
rates (vs PPP exchange rates) and expressed in US dollars
 Purchasing power parity exchange rate is
calculated to yield absolute purchasing power
parity
 The PPP adjustment substantially raises the
relative income of poor countries

e.g., India's PPP GDP is about 4 times its
market exchange rate GDP
 The PPP adjustment thus makes world
income distribution look much more equal
than the distribution of market exchange-rate
incomes
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Purchasing power parity (PPP)
 To compare economic statistics across countries,
data must first be converted into a common currency
 Unlike conventional exchange rates, PPP exchange
rates allow this conversion to take account of price
differences between countries
 Recently, PPP exchange rates have been calculated
comparing the cost of a common basket of
commodities in every country
 By eliminating differences in national price levels, the
method facilitates comparisons of real values for
income, poverty, inequality and expenditure patterns
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Empirical examples of the results of
disparities in purchasing power
1) Countless migrants leave high prestige jobs in
poor countries in order to make more money in
less prestigious jobs in wealthy countries,
sending a portion of their income back home in
the form of remittances
2) Many working and middle class Americans have
the option to live out their retirement in poorer
countries, collecting social security payments
and pensions, which though meager in the US
context, can go relatively far in a poorer country
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Big Mac Index, July 22, 2010
• Burgernomics is based on the theory of
purchasing-power parity, the notion that a
dollar should buy the same amount in all
countries
• Thus in the long run, the exchange rate
between two countries should move towards
the rate that equalizes the prices of an
identical basket of goods and services in each
country
• Here "basket" = McDonald's Big Mac, which
is produced in about 120 countries
• Big Mac PPP = exchange rate that would
mean hamburgers cost same in US & abroad
• Comparing actual exchange rates w/ PPPs
indicates whether a currency is under- or
overvalued
[The Economist,
http://www.economist.com/markets/bigmac/about.cfm]
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Prop. 2. World PPP-income polarization has
increased, with polarization measured as richest to
poorest decile
 Contrast between what top 10% can buy with
income (concentrated in core countries) and
what bottom 10% (mostly in Africa) can buy
 The polarizing trend is even sharper if you
look at top 1% and bottom 1%
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Prop. 3. Between-country world PPP income inequality has
increased since at least 1980, using per capita GDPs, equal
country weights (China = Uganda), and Gini coefficient for
the whole distribution
 By weighing countries equally – treating each
country as a unit of observation – we can test
growth theory and the growth impacts of
public policies, resource endowments, etc.

e.g., we can arrange countries by the
openness of their trade policies and see
whether more open countries have better
economic performance
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Prop. 4. Between-country world PPP-income inequality has
been constant or falling since around 1980 - with countries
weighted by population
 This is the trend the neoliberal argument celebrates,
but there are 2 problems:
1) exclude China, and this measure shows a widening
2) exclude India and it's more pronounced
 Thus, falling income inequality is NOT a general
feature of the world economy

 China and India have 38% of world population, so
they shape trends in world poverty

China's avg PPP income rose from about 1/3 of world
avg in 1990 to almost ½ in 1998
 There are problems w/PPP measurements in both
countries b/c they didn’t participate in int'l price
comparisons on which PPP calculations are based
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Prop. 4. (cont’d)
 There's rising inequality in both countries, esp
by region

Ratio of avg income of the richest to poorest
province in China rose from 3.2 in ’91 to 4.8 in
’93, where it remained in ’98-2001; India’s was
4.2, the US’ 1.9 in the late 90s
 Dispersion in pay rates in manufacturing have
steadily widened since the early 1980s
 Absolute income gaps are widening fast
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“Globalization, Growth, and Poverty”
(World Bank 2002)
 Less globalized/more globalized is calculated on basis of
changes in trade/GDP ratio 1977-97

trade/GDP ratio is the sum of exports and imports divided by the GDP
 Data show that more globalized countries have faster economic
growth, no increase in inequality, and faster reduction of poverty
than the latter, BUT the classifications are dubious
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Using “change in trade/GDP ratio” as measure of globalization skews
the results
It’s possible that more globalized countries are less open than many
less globalized countries, in terms of trade/GDP and size of tariff and
nontariff barriers
Many globalizers initially had very low trade/GDP ratios and still had
relatively low ratios at end of period
 “To call relatively closed economies “more globalized” and to
call countries with much higher ratios of trade/GDP and much
freer trade regimes “less globalized” is an audacious use of
language” (196)
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Conclusion: Falling inequality is not a generalized
feature of the world economy
 Several studies suggest that world income inequality has been
rising
 The trend is sharpest when incomes are measured at
market-exchange rates
 PPP-adjusted incomes, in principle, are more relevant to
relative economic well-being, but market exchange rates are
highly relevant to state capacity, inter-state power, and the
dynamics of capitalism
 One combination of inequality measures does find that income
inequality has been falling – PPP income per capita weighted by
population (Prop. 4) – but exclude China and even this metric
shows rising inequality
 Absolute income gaps are continuing to widen
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