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How Great is World Inequality?
by Branko Milanovic
Issues of income inequality have recently gained prominence. Increasing inequality in North America and Western Europe in the 1980s, an ‘explosion’ of inequality in transition economies in the 1990s, improvements in the economic theory of inequality, and more and better data, have all stimulated a new interest in inequality.
In the policy debate, as well as in the media, rising inequality has become linked to the phenomenon of globalization. But the issue is more complex than it first appears. Globalization is eroding the importance of national borders to economic life. So, we need to know whether world inequality is rising. For even if within-country inequalities are rising, world income inequality need not increase, or may even decline, if the poor (and populous) countries grow faster than the rich (and less populous) countries. Therefore, even if globalization can be shown to raise within-country inequalities, globalization may still lessen income differences between individuals in the world.
World income distribution must be distinguished from inter-national income distribution, which is based on differences in mean incomes between countries (weighted by population). But the latter does not take into account income inequality within countries. This is what world income distribution does.
Calculating the World Income Distribution
To make our calculation we need household-survey data for most countries. Fortunately, we now have 216 household surveys from countries that together account for over 90 per cent of the world’s population and more than 95 per cent of world GDP. This data allowsus to compute world income distribution for two ‘benchmark’ years: 1988 and 1993 (sufficient data is not yet available to cover later years). Details of how we compare the real welfare of people from different countries in US dollars at purchasing power parity ($PPP), as well as further methodological discussion, is contained in a working paper posted on the Web site of the World Bank (details are at the end of this article).
The world Gini coefficient was 65.9 in 1993, an increase on 62.5 in 1988 (in $PPP). The implied increase of about 0.7 Gini points per year is very high. For example, during the 1980s, inequality in the US and UK increased by about ½ a Gini point per yeara rapid rise by historical standards. Remarkably, the increase is from an already very high level of inequality (and is present when we use either PPP dollars or current dollars, and when we use the Theil index which is another measure of inequality).
The bottom 20 per cent of the world’s population received only 2 per cent of total world $PPP income in 1993, down from 2.3 per cent in 1988, while the share of the bottom half fell from 9.6 per cent to 8.5 per cent (see Table below). Overall, the richest 1 per cent of people in the world (50 million people) receive as much as the bottom 57 per cent (2.7 billion people).
Why is World Inequality High and Rising?
World income inequality is high because the greatest contributors to the world Gini are countries with large populations that are at the two poles of the income distribution spectrum. One poor pole consists of 2.4 billion people who live in countries whose mean income is less than $PPP 1,000 per year (see figure above). They include many African countries, both rural and urban India, rural and urban Indonesia, and rural China. The rich pole consists of ½ billion people who live in countries which have an income level of over $PPP 11,500. They include France, Japan, Germany, the UK, and the US. The poor pole accounts for 42 per cent of the world’s population and 9 per cent of world $PPP income; the rich pole accounts for 13 per cent of world population and 45 per cent of world $PPP income. Populous countries that have ‘middling’ per capita incomes (for example Brazil, Mexico, and Russia) do contribute to inequality but less so than the two polar sets.
Much of the rise in world income inequality between 1988 and 1993 is due to the fact that income growth in the developed OECD countries exceeded income growth in the rural areas in large South Asian countries (India and Bangladesh) and in rural China. Thus, mean per capita rural income in India increased by 5 per cent in current $PPP terms between 1988 and 1993; by 14 per cent in Bangladesh, and by 21 per cent in rural China. Meanwhile, mean current $PPP incomes rose by 24 per cent in the US, 60 per cent in Japan, and 43 per cent in Germany. The rest of the increase in world inequality is accounted for by widening differences within China between urban and rural areas (current $PPP incomes in urban China rose by 70 per cent) and between urban China and rural India.
Thus, we are left with a bleak picture; the differences are extremely large, and seem to be increasing. To reduce world income inequality we need the populous and relatively poor countries-China, India, Indonesia, Bangladesh, and Nigeria-to grow faster than the world’s rich countries. This, moreover, has to occur without any (or much) increase of their within-country inequality. This is the challenge that policymakers face today.
Dr Branko Milanovic is Principal Economist in the World Bank’s Development Research Group and the author of ‘True World Income Distribution, 1988 and 1993: First Calculation Based on Household Surveys Alone’, World Bank Policy Research Working Paper No. 2244 November 1999), available from the Web site: www.worldbank.org/ research/transition/.
This article is based on Dr Milanovic’s UNU/WIDER public lecture delivered in Helsinki on May 18, 2000. UNU/WIDER’s World Income Inequality Database (WIID), together with further papers on poverty and inequality can be accessed through our web site (www.wider.unu.edu).