Branko Milanovic - Global Income Inequality

thank you very much run it is a pleasure to be here I hope that you would keep me on a short leash so that I also stay within 15 minutes I work a lot with data but as Rob mentioned actually in the very beginning my book published five years ago the epigraph in that book was this sentence from David ransom on that I actually found and I was never actually sure what he meant but it appealed to me a lot the sentence says this is the world in which everyone is sensitized to risk but indifferent to fate and I've tried this sentence so many of my friends and they just don't get it but recently they have started getting it and I think over the last two days we have heard a normal amount of discussion of risk I don't know if risk has been mentioned more than probably ten thousand times in two days but I will not speak of risk actually I would speak of global income distribution and as I will argue the global and actually show with data the global income distribution is basically result of two factors in both our faith which means they are not determined by your effort and these factors are your citizenship and the parents family income level of the family where you were born so this is a discussion of faith before I go on that I have actually to go through my staple graph which basically shows three ways that we can look at international or global inequality now the top one shows you three individuals they each come with an average income of their country which is reflected in the height of these three individuals so imagine basically running and inequality statistics over 180 countries unweighted by their population so it's like a General Assembly of the United Nations each country counts the same each country comes with a representative income which is basically GDP per capita now concept number two which is underneath shows you the same height of individual so individuals still enter with their average incomes but its population weighted so obviously China now would much more matter in this concept to global or actually international inequality then a small country like child or Luxembourg and so on but notice that the height of individuals is still representative income again we will do the work with GDP per capita because that's the most accessible source and basically you need only two data points for each country here you need mean income of that country and you need population okay what is the third one which actually is the most interesting and the most difficult one it is global inequality which means that you take the entire world and you treat the entire world as if it were one country and you do actually find I mean theoretically using household surveys you find income of it of every individual you convert these incomes using purchasing power parity I will not speak much about that it's a huge topic on its own right but then you basically convert them to express the welfare of each individual in the world now one big thing there of course as you can see now individuals come with their actual income so the country which is in the middle might have an individual which is actually quite rich and quite poor the big difference between concepts 1 and 2 and concept 3 on the other hand is that concept 3 requires household survey data so that was the reason why concept 3 has not been calculated until recently because there were no data for important chunks of the world like most of Africa like China until 1982 and like the former Soviet Union until the late 80s so what do we find then if we do concept one concept two and concept three calculation for the world between 1950 and 2007 this is called the mother of all inequality disputes in reference to a full award leader who like to use this particular sort of social equality comparison mother of all something so in this case its mother of all inequality disputes and why you will see it in a second because this is the results that we get for chub before concept one inequality remember these are unweighted GDPs now you will notice that with 1980s and it was actually Jamie referred to that as well we really have a beginning of big divergence of income and that of course flies in face of everything that we have studied in neoclassical growth economics were actually during globalization we were expecting and actually much greater similarity of economic policies we would expect great convergence to happen well it did not happen the convergence happened within the EU and within the rich world but globally we have had divergence now it's true actually in the last six years before the crisis as you can see from the graph actually forgot to mention the vertical axis is the Gini coefficient so when that that graph goes up that means that there is greater inequality between mean incomes of the countries which means that there is a divergence when the graph goes down then of course there is some convergence so this is obviously by many people who are critical of globalization they say rightly so incomes between countries have diverged it is as I said before this is not something that we were expecting during the era of globalization were exactly the opposite should have happened however with concept to something very different happen because now we are waiting all these GDP per capita and here basically with mid 80s and early 90s China obviously moves in in a big way and starts driving this concept to inequality down more recently and I don't show it here but elsewhere I'll show it India actually becomes the second engine of convergence according to concept to inequality how about concept three inequality as I said before we cannot go backwards because there are no data and because for each of these data points which are now sort of jumping on these slides you actually have to have in the background 120 approx household service with you know thousands of individuals that I actually then divide I'd into percentile groups and then calculate overall Gini now as you can see for global inequality you don't see much of a trend what you do see is that global inequality says the Gini coefficient which is today 70 Gini points so I want you to remember that number it's an important number it has never been recorded in history that there was a country with the genius 70 points it doesn't exist countries like South Africa and Brazil are countries of about 55 to 60 Gini points not seven to Jeannie points so world is obviously a much more unequal place if I were to use the same population but not use PPP's simply use actual dollars that Jeannie would be eighty this is something absolutely unheard of just to give you another sort of idea what is the Gini of 70 us Gini which of course is very high is in the forties range forty two forty three forty five by the way accident just a simple note for some of you from from the European Union currently the European Union twenty seven members if you take their actual incomes and you can do that with Eurostat nowadays actually you a European Union has the same Gini as the United States but of course the origin of that tiny quality in the EU is different because it includes poor and rich countries so but just sort of to bring to the feta mean to the attention the fact that European Union is a pretty unequal place today so this is the Gini coefficient for the world and this is my concept three inequality now the the difficulty of figuring out intuitively what drives global inequality stems from the fact that is given by three forces of an equal magnitude but two of them go or went in one direction which was increasing inequality and one of them went into a direction of reducing inequality now the two that actually drove inequality up as you can see here are the first generally speaking within national inequalities have gone up and remember this with the National and equalities explain that the difference between concept two and concept three because what does gone SEP 3 include it includes the additional inequality which is due to the fact that not all Chinese have the mean income of China and not all Americans have the mean income of the United States the second factor is the divergence of incomes which are already mentioned so that divergence obviously adds to global inequality as well but the equalizing big equalizing factor is obviously China and India now much of what will happen in the future will obviously depend on what happens to China and India with with and their growth rates with respect to the rich world this is I'm going to go over that in once in a second because this simply shows you the population coverage of this concept 3 data actually it is the weakest unfortunately in Africa so the measures of inequality basically under estimate true inequality because quite a few I mean countries like Sudan Zaire Somalia are not included in the service so this is simply giving you the same numbers that I've already explained you will see here on the bottom this tremendous Gini of 80 Gini points if you do not adjust for PPP s and this is when you adjust for PPP is the most recent data as you can see it's slightly lower Gini than the previous five year period but obviously we are not talking about statistical significance of that now what does actually genius 70 also mean well there are many numbers here focus just on one number 10% of the people in the world have 55 percent of global income so it is not a 50/50 world it's more than 50/50 world ten percent of 55 and ninety percent have 45 I gave here for comparison for instance just to see how it looks in the single country like Germany where the top 10 percent have 25 percent of German income I will skip that because I want to focus on some incendiary statistics very easily understood I think in this audience which is these income of the richest expressed in the income of the millions of the poorest now I start with myself and say what is the annual operating budget of the IMF and the World Bank and I get it it's equal to the income of 70 million people poorest people in the world so 70 million then I say okay let's take Goldman Sachs bonus in 2009 well that's equal to 224 million poorest people annual income of quarter of a billion poorest people in the world then I take IRS report of four four hundred richest Americans in 2006 well they have income which is equal to 640 million poorest people in the world which is approximately the population of Africa so you have this four hundred guys and then you have six hundred forty million people that's a big difference then I take one percent of the richest Americans in 2005 and they have an income which is equal to income or 1.6 billion people and of course 1% of the richest people in the world with income which is equal to 4.3 billion people you might like or dislike numbers the numbers per se don't have sort of a message they are moral or otherwise but they are useful to know how was it in the long run is it something really special now that we see well in the long run this is the picture of concepts 1 & 2 based on medicines data basically the Industrial Revolution was this big bang which of course created rich countries and also countries that really remained that they're all the income level and then gradually there was this increase throughout 19th century of concept 1 and concept 2 inequality and now we are kind of a plateauing in these two concepts however there was one big difference that I really would like these are not important things it's actually technical things which explain the changes but a big difference between then and now is oh sorry is this one is that if you take inequality in 1850 most of inequality and this when you decompose it most of inequality was due to the fact that they are unequal people within countries so they were rich people in England and you know rich people in France and rich people in the United States and rich people in maybe India and elsewhere most of inequality was due to what you can call class which means your position within your own national income distribution nowadays and that's why it's speak of fate nowadays the situation is exactly the opposite if you decompose global inequality most of it actually 80 percent or more is due to your location which means your citizenship basically in a world with not much mobility of Labor and citizens so now you really have what they call the under the non Marxian situation because in 1870 you could argue that the conditions of workers and peasants in many countries were similar they consequently there could have been some commonality of interest between them in 2000 or 2010 you cannot argue that because the prevail prevalent share of global inequality is due to the place of citizenship and I will then have to go fast with the other slides but I just wanted to mention and important this is going to go way this is for Anglophones audiences they love this but the best would go away you want to Jane Austen okay so let's go very briefly one minute Jane Austen with the national income distributions have shrunk so here I have mr. Darcy I'll have Elizabeth's family's per capita income and I have Elizabeth alone and many of you have read the book so I will not explain necessarily it's actually she could happen to actually have that median income in the case that the property is not entail it is under the entail and if she doesn't marry mr. Darcy she would end up with that amount of money now I we have social tables for UK for England actually more exactly 1801 1803 so we can locate these individuals mr. Darcy and end the Bennet's in the income distribution of the time and then you actually can compute that the advantage of marriage for for for Elizabeth is about hundred to one a rather than remaining alone it's a huge advantage and of course marriage really seems a very very exciting proposition under such conditions it is less exciting I mean it is still exciting today because we also take the income distribution today locate these people from various income distributions and find their place and then the ratio here is 21 so that was my illustration for the changes in in within component so remember there are two things here the between component which means between countries has really become much more important and the within component in the long term term despite the recent increases in inequality in the US and China and UK has become over the long term less important and this is what you can see also in this particular slide where you actually see the position of each percentile on of German income distribution which is on the horizontal axis and you see their position in the global income distribution so now you see the poorest Germans actually are at the 70th percentile of the world income distribution the poorest 1% L of Germans if you take India or I could take many other countries you actually end up with a with the richest 1% I'll only at something like 80th percentile of the world income distribution in other words these distributions do not overlap and this is a justin'll so to skip to a few others this is the reason this is a very interesting one this is Brazil because Brazil's distribution goes from the bottom actually the poorest Brazilians are as poor as anybody else in the world to the hundreds percentile because the richest Brazilians belong to the top percenter and the result of these unequal distributions and they will finish there is there are unequal incomes between the countries is that as we started with faith is that 60% of variability in personal incomes can be explained by single variable which is the mean income of your country the country where you're born if by some sort of machine with sort of tricks I also introduced there depending on the coefficients of mobility of income within your country introduced there adjustment for the probabilistic adjustment floor what was the income class of your family I am able to explain about 80% of global variability in personal income I would submit to this last statement I would submit it's a big thing actually if you tell me that at this very moment they are let suppose thousands of kids who are being born and then that is very moment we can say with these two variables which we know it is very instant where are they born and who are the parents that we can say we can get an R square of 0.8 about their future incomes I think it's something it's a that effect you can think like it not like it but I think as I think Lenin so too said the facts are stubborn and unless things change that fact is not going to go away thank you very much you

Channel: New Economic Thinking

Views: 15,662

Rating: 4.7647057 out of 5

Keywords: Global, income, inequality, Branko, Milanovic, The, Consequences, of, Inequality, and, Wealth, Distribution, INET, institute, new, economic, thinking, economics, king's, conference, cambridge

Id: SMsirg7Z0bU

Length: 19min 7sec (1147 seconds)

Published: Fri Apr 30 2010