- Today we will be speaking
about global distribution
of income, and its political meaning.
Now, before I start, here is a little bit
of structure of the talk
that you can of course read.
I would like to make some definitions.
People often don't like definitions,
but I think in this case,
we really have to be
quite clear about what we are talking.
When we say global distribution of income
we mean distribution of
income between all citizens
of the world.
As you will see in a minute,
I will talk about history,
but that means also
that if we were to look
at global income distribution today,
which we will do as well,
we would actually look
at the distribution of income
among 7.4, 7.5 billion people.
Now, obviously we don't have the data
for more than seven billion people,
but what we do have, we
have household surveys
which are representative
for the countries,
and we practically have household surveys
that cover about 95% of the world.
They cover also about 95%
of the GDP of the world,
so essentially we are actually
pretty good, currently,
in estimating the overall
distribution of income
in the world.
I have also to say that
when we do define income,
we define income in what is
called international dollars.
That means that these are dollars
whose purchasing power
in principle is the same
in all the countries.
Now to explain a little bit what it is,
it is essentially you take a currency
of a given country, like
suppose you go to India
and you take Indian rupees.
Now we know that Indian
rupees if you were just to do
a conversion from the market exchange rate
will buy more food in
India than they would buy
in the U.S. because simply the
food is more expensive here.
Or compare for example India to countries
where the food is very expensive,
like Norway or Iceland.
So we have to adjust for that.
It's not only food, it's
housing, it's clothing,
many other things.
So in order to adjust, we
actually have a very large project
which is called International
Comparison Project,
that does price comparisons
across the world.
So we use the data from that project
to re-express the rupees
or the domestic currencies
in terms of its actual purchasing power.
So that particular unit is
called the international dollar.
So everything that I will show you
will be mainly calculated
in international dollars,
meaning that the questions
like do we really account
for the fact that in Asia,
for example, prices are lower
than the U.S., the answer
to that question is yes,
and that will be throughout
the presentation.
So, let me just start with
the structure of the talk
and we'll see how far we get.
We might not cover all
of it, but we might cover
like maybe two-thirds.
First of all, I think there
are two things to realize
when we talk about global
distribution of income
currently we are talking
about a very special period
that we live through
which is that capitalism
is the only mode of production,
the only way that production
is organized in different
countries of the world,
including in China.
Second thing is that
we're witnessing a period
of the reemergence of Asia,
which means that actually
it is bringing the distribution
of economic activity,
within this grand continent of Eurasia,
to the way that it looked around 1500.
Now why it is important to emphasize
is because the period between
the Industrial Revolution
and the end of the 20th century
might have been an anomaly
in the global distribution
simply because Asia was much poorer
than Western Europe and North America.
But that was not the case, let's suppose,
in 1500 where obviously America
was quite underdeveloped,
and the level of income
in most European countries
was the same as in China.
So we now have this
sort of equalized system
in the world, if you want to call this
convergence of income,
mostly driven by the rise
of mean incomes in Asia.
Finally, when I do the
inequality decompositions
I think it's important to emphasize
that in inequality decompositions
are not an objective in themselves.
In other words, you do
inequality decomposition
not only to simply show the
percentage of inequality
that it is due for example
to inequality between countries' incomes,
whereas there's inequality
within countries,
but to explain politically what it means.
So these numbers should not be
just simply seen as numbers,
they should be seen as
numbers that reflect
the social reality which is behind him.
And I think it's important to mention
to students in general,
because whenever we do
a decomposition, we really
look for a political
and social meaning of that decomposition.
If you take, for example,
inequality in New York
and then compose it by boroughs,
the objective of that is
to tease out inequality
between the boroughs
and within the boroughs.
It's not simply just
to show a given number.
Then I would actually say
something about the world -
the difference between
the world of averages
and the world of heterogeneity,
because it is the latter,
the world of heterogeneity,
that we can actually
much better appreciate
when we have detailed data
from household surveys and microdata
from across the world.
And then maybe we'll say
something about the political
philosophical issues which
are raised when we look
at global and not only
at national inequalities.
Now, let me start with the long run.
The long run basically means that we go
through the first attempts
to actually estimate
global inequality, which is due to a paper
by Francois Bourguignon
and Christian Morrisson,
published in the early 2000s,
and which looks at estimates
of global inequality
from 1820 onwards until 1990.
So in other words, they
cover about 170 years
of global inequality.
Now, the data are based
on Maddison's estimates
of GDP per capita, which
have existed for a while
and are being refined all the time,
and I have done in this
graph, I've taken the numbers
from Bourguignon and Morrisson
about the distribution
within countries, and then
applied the new numbers
from Angus Maddison's project.
But you know whether you
apply the new numbers
or the old numbers from Maddison's project
the basic storyline is the same.
So what is this storyline, is
that the Industrial Revolution
can be seen as some kind of a Big Bang
in development of inequality.
Before the Industrial
Revolution, the differences
between country incomes
were relatively limited,
and as you can see on the vertical axis
where you have a Gini index.
The Gini of the world was
then estimated around 55.
Now, 55 is a large
number, in terms of Gini,
but it's a number that for
example many Latin American
countries have today.
So it is an high level of inequality,
but even countries today have
such high level inequalities.
So the world, as you can
see right from the graph,
is you can see that actually
the Gini index goes up,
the world was unequal, but
not as dramatically unequal
in 1820, where our numbers begin,
as it was in 1920, 100 years later,
when we look at the situation
after the World War One
and just prior to the Great Depression.
So the question then becomes
how do we explain the
degrees in inequality
between 1820 and 1920?
Well we explain it relatively easily
by the rise of the West, by
the Industrial Revolution,
which precipitated increasing income
of people living in Northwestern Europe
and North America and later in Japan
and they became richer
compared to people in Asia,
especially people in China and India.
So if you want to have
like, how should I say,
a very simplified view
of what is happening
to global inequality,
I think it is important
to focus on three parts of the world:
The West, India, and China.
And these are three parts
of the world that determine
more or less 50 plus
percent of what's happening
to global inequality.
So, in one part of the
three, which in this case
is the West, becomes
richer, and the two parts,
India and China, either
are stagnant or decline,
then of course you have
widening disparities
and rising inequality.
I will come in a moment to what happened
to inequalities within nation states
because obviously they play a role,
but within this grand view of things,
the major engine of rising inequality
was indeed the rising
gap between mean incomes
of the nations of the West versus Asia.
Then you notice actually
in the second part
of the 20th century, we still
have the rising inequality,
and then finally after
World War II, and the period
of U.S. dominance, that
increase of inequality
comes to a stop, as you can see here,
the Gini coefficient is extremely high.
It's between 70 and 75,
so it has actually increased
from 55 to almost 75,
so a significant increase over 150 years.
And then at the very end of this graph,
after approximately 1990,
and based on much more detail
today that actually now we have,
and I'm quoting here the work
that Christoph Lakner and myself did,
so these are obviously
better than the data
which existed in the past.
We noticed a very significant decline
in our global inequality.
And that's linked with the rise of Asia.
Now, I have to say that
one thing which sometimes
confuses people is the following:
How can we at the same time speak
of increasing national inequalities
and declining global inequality?
It is important to realize
that these two things
are not paradoxical developments.
They can actually happen,
and they actually are
happening now, at the same time.
In other words, at that
very end that you see
where a decline inequality is driven
by the catch-up or by
convergence of incomes in Asia
compared to the incomes
in the rich countries.
And this particular crisis, for example,
the most recent one with the COVID virus,
is something that would further
accelerate that convergence,
because as of now it seems
that countries in Asia
would be less affected in
terms of their growth rates
than the rich world.
So this is the part of
the global convergence
that plays such a big
role in global inequality.
But at the same time, inequalities
within each nation-state
can go up, and indeed if you compare today
inequality in the U.S. with
inequality 30 or 40 years ago,
if you do the same thing
for China or India or Russia
you would find the increase of inequality.
So these, within national inequalities,
play sort of an offsetting role.
Ideally we would have global convergence
and declining inequality within countries.
That would then really
push global inequality down
for two reasons.
There would be countries
converging in their mean incomes
and within each individual country,
rich and poor people
would become more similar.
But that's not what we observe today.
We observe the first element,
which is the convergence
of mean incomes, but within
each individual country,
rich and poor people become
more and more dissimilar.
So these are really these
two effects that work
one against another, and overall
to determine what happens
to global inequality.
So another way to show
that is precisely to look
at these two elements over time.
So this is the first element,
which is the between country inequality,
now I am actually showing it
in the terms of the Theil coefficient
rather than the Gini, the
reason being the Theil
is what is called exactly decomposable,
which means that when I put
together the between country
component and within country component
they add up exactly to the
total Theil coefficient.
So notice here how small
is that between country
component in 1820?
This reflects what I was saying before,
small differences in mean
incomes between nations.
In other words, for
example, China in those days
as we will see that later,
was about only one half
of the income of Great Britain.
But that gap between
China and Great Britain
after 100 years, so 1920,
actually increased to 10 to one.
That of course is why this is exactly why
the blue bar is going up.
So the blue bar shows that
gaps between the countries
are getting larger and larger,
that the divergence between
mean country incomes
becomes greater.
You see already by 1950, that divergence
in the Theil numbers is 60,
whereas in the beginning
of our period in 1820 it was less than 10.
It stays at that very
high level all the way
to the years 2000.
And then, of course, you see
as what we have already seen
with the Gini coefficient,
we see the decline
of the between-country inequality,
or we see, the other way to express that,
is to say that we see
convergence of incomes.
Now the second component, as you know,
is the component of within inequality.
Now go back here also to 1820.
What do you observe?
You observe really very high share
of within country inequalities
in total living population.
And that continues again for 100 years
and it's actually, the blue bar,
sorry, the red bar
indeed is becoming bigger
and bigger is rising.
So when we look at the 19th
century, what can we say?
We can say that that
century is characterized
by, first, rising divergence
between countries,
and rising inequality within countries.
In other words both the
blue bar and the red bar
are becoming longer, and
the two of them together
push global inequality up.
So this is the first period that actually
where we witness the increasing
between-country inequality
and increasing within-country inequality.
So we can call it the age of
empires and class struggles.
It is the age of empires
because it coincided
with essentially European
ability to project power abroad
and to conquer and to
colonize countries in Asia
and Africa, and at the
same time it coincided
with a period of class
struggles within nation states
as reflected in the rising
within-national inequality.
So there we had really
for more than 100 years
we had two components rising
in unison, as it were.
Rising differences between countries,
and rising class polarization,
rising inequality,
within nation states.
So both of them push global inequality up.
That period, broadly
speaking, comes to an end
after World War II, where
we actually have something
that was, to people for
example who were born
at that time, and lived their
early life in that time,
seem clearly like a structural
feature of the world,
which was the division of
the world into three worlds,
the First World, which
is the rich countries,
the Second World which was
countries that were less rich
but most of them were socialist countries,
and the Third World, which
was composed of Latin America,
Asia, and Africa.
Now, as you see that
world was sort of almost
a paradigmatic reflection
of large differences
between the countries.
You see actually the blue
bar is very, very high
throughout the whole period.
But you also notice that
the red bar shrinks.
Now the red bar shrinking
reflects what we now call
the period of easing of social tensions
and social divergence
within many other countries.
As we know for example, after World War I
especially after World
War II, the welfare state
was created in the West, socialist regimes
in Eastern Europe and
China dramatically reduced
inequality within those countries,
and even the Third World countries,
some of them which went
for impressive policies
also reduced inequality within countries.
So in the second period,
which I called here
as you can see, the
age of the three worlds
and diminished class
conflict, we have very high
divergence in incomes
between nation states,
but that divergence does not increase,
and we have shrinkage of
differences within countries.
And then we come to the last period,
which is basically the
period that we in live now,
and this is the age of convergence,
mostly because of Asia.
We don't have yet convergence of Africa,
which is a topic I will return later,
because convergence of
Africa is absolutely crucial
for us to continue having
convergence of incomes
in the world, or in other
words, for us to continue
having this blue line,
blue bar rather, shrinking.
But for the present, is is
actually sufficiently strong
the convergence in Asia
that shrinks the blue bar.
On the other hand, if you
very carefully look at that,
you will notice some
widening of the red bar
indicating the increased
polarization of cleavages
of incomes within countries.
So this is something that
I was talking about before.
Rising inequality, whether
it be Russia, or China,
or United States, or the UK,
or practically two-thirds of
the countries in the world.
And as you can see then,
we really can very easily
divide the global history
of the last 200 years
into three periods that I've
just defined and discussed.
But you know this is the
objective of the studies
in global inequality, not
simply to line up the numbers,
but to actually make us understand
what are the forces, grand forces,
that actually drive this difference.
So the political meaning
of this decomposition
is something that I already talked about,
so here is simply the summary in words
that in any decomposition we should look
at social and political
meaning, not just a look
at the numbers, and then in a global sense
we have to ask the question:
What is the principal cleavage?
Is the principal cleavage
between the countries
or between individuals within a country?
You know the implications
of that are very different.
If the principal cleavage
is between the countries,
it has implication on two things,
which can be stated independently,
and are both important.
One, if the cleavage is
between the countries,
that means that first
inequality of opportunities
between individuals in the world
is heavily determined
by where you were born.
So that's a very important component.
In other words, it means
that the main cleavage
which determines your future income
is not necessarily whether you were born
to a poor or rich family within a country,
but whether you were born
in a rich or poor country.
The second of course implication
of such a big cleavage
is that you naturally will
have large immigration flows,
because if the gaps of
income between countries
are very large, then a way
to sort of reduce that,
and of course the incentive
of people to reduce that,
is to migrate.
Differently, if you had
a world, and imagine
a world like that, where the differences
between the countries were very small.
It's a little bit like the European Union,
the original European Union, of EU-15,
where the gaps between
the mean income in Germany
or Italy and France are very small.
Then you really have the cleavage becoming
a class cleavage.
In other words, the essential
issue is not whether
you were born as such
in France or Germany,
the essential issue is
whether you were born
in a poor or rich family
in those countries.
So that these two cleavages have worked
actually differently in the three periods.
So the third period is the period that
for which I don't have
a name or an author,
I should think of an author
that best reflects the period,
but that period is relatively recent,
and it's different from the other two,
because it has now
diminishing inequalities
between countries, and increasing
cleavage within countries.
In some sense, it is not
a period very dissimilar
from the 19th century precisely
because the differences
within nation states now
are becoming more important.
But the difference between that period
and the early 19th century
is that we now have
Asia converging and not
actually Asia and Europe
and North America diverging
as it was in the past.
So it is a different period than the one
in the 19th century.
In other words, you can actually
say if the rising incomes
in Asia, which are actually
driving this reduction
of global inequality,
leads to the increasing
inequalities in advanced countries,
and also in countries like China,
but individuals also care
more about their relative
national positions, then
as you can read here,
then a concern with rising
national inequalities
would significantly
outweigh in terms of welfare
or your own interests, the
advantages of rising welfare
from the higher global absolute income.
So we really have to take, when we talk
about global inequality,
now into account also
how these inequalities are
reflected in our individual
sort of views of the
world or nation-states,
and how we would actually
observe the same reality,
but some of us would
be much more concerned
with rising inequalities nationally,
and others would actually
be much more concerned
with declining inequalities globally.
So let me then go very
briefly over the world
of averages and the
world of heterogeneity,
and then finish with
the so-called elephant
chart which sort of shows
the developments in global inequality
in the last period, last
30 years, approximately.
The world of averages
is the world where we
actually don't look at
distribution within countries,
we just look at mean country incomes,
and I illustrated here,
which something that already
mentioned essentially,
is that how this world
of averages has been
driving global inequality.
Here on a graph you'll
look at relative incomes
from China, Indonesia, and India
in comparison to the UK, or
in the case of Indonesia,
with respect to the Netherlands,
over the last two centuries.
And of course what you see
is that these countries
in Asia have really sort
of been impoverished
during the period of colonization,
so you actually see a dramatic decline
of their relative income,
because their relative incomes
have shown on the
vertical access in percent
of the colonial powers' relative income,
and then you'll see that
actually there is an upswing
of the 1970s where
actually these countries
are becoming richer.
So then let me go into the changes
which have happened
over the last 30 years.
First of all, we have a
change which you can call
the emergence of the global middle class.
Now that middle class,
we have to use that term
little bit carefully, because
it is the middle class
from the global perspective,
simply because these are
people who are in the middle
of the global income distribution.
But compared to the Western perspective,
these people and their incomes,
that they're relatively low.
If you compare however
the distribution in 1988
and the distribution in
2011, what you notice
is that there is this
middle of the distribution
which is now much thicker
than it was in 1988.
You notice that the red line
which shows global distribution in 2011
being significantly
more above, or thicker,
more important than the blue line
around the middle of
the income distribution.
So this is this emerging
global middle class,
even if the name global
as they say somewhat
a misnomer because it includes people
from all kind of levels from
three or four dollars per day
which is relatively
low, to people who have
about 16 or up to even 20 dollars per day
which is better, but still
again by Western standards
would be relatively low income.
And that was, of course,
led to having global
income distribution now in 2013,
that we have the most
recent data, 2013/14,
where we have global poverty
according to the World Bank poverty line
which is about 10% of
the global population.
So these are the people that you can see
on the horizontal axis with
incomes below $600 per day.
So essentially it is income which is
below two dollars per day.
So this is this global
poverty of 10% of people.
Then we have the median income,
which as you can see
here, at $2600 per anum,
and it is significantly
below the mean income
which is at about $6000 annually.
Now, the median income
of the rich countries,
and that's the abbreviation
stands for Western Europe
North America, and you'll see on here,
is at the 95th percentile of
the global income distribution.
Now this is important to highlight
and to make very clear, is
that essentially when we talk
about income distribution
in rich countries,
whether it be U.S. or
Denmark, or Germany or Japan,
we are really talking
about the distributions
which take place within the top 20%
of the world distribution.
So all these changes
and fights about income
and the gains of the rich
on the account of the poor
really happen at what is globally,
from the global
perspective, what is really
the top quintile, or the top
20 percent of the population.
So in other words, rich
countries do not have
too many people who are
below the 80th percentile
of the global income distribution.
You will see that you
will find some of them
but they are relatively few.
So then how did global
income distribution change
between 1988 and 2011, or
2008 in this particular graph.
It has changed in a way that
is in some sense intuitive,
and that this graph shows you
on the horizontal axis
you have people lined up
by their percentile in the
global income distribution
from the people on the
left who are the poorest,
you know, the bottom five percent,
to the people on the
right who are the richest,
and it's really this
famous top one percent.
Now, what you notice on the vertical axis,
and what we show on the vertical axis,
is the real income increase in percentage,
cumulative percentage, percentages,
over these 20 years.
And what the graph shows very clearly
is that the cumulative rise of income
has been the strongest around the middle
of the income distribution
where we indeed find
the bulk of the population
from Asian countries.
Not only China, because of
course we focus on China
since China had such a
dramatic development.
But there are other countries,
there is India, there is
Indonesia, Thailand, Vietnam.
They all had significant expansion
of their own middle income distribution
or higher parts of distribution,
but from the global perspectives,
they are not very rich.
I mean, people who are not at the very top
of income distribution.
But then the second point, which is,
this is like the first
point that you can call
quote-unquote China's middle class
that had the very good period
during the globalization.
Then the second point,
people who are richer
than the so-called China's middle class,
but they didn't have a very good period
during these 20 or 25
years, and you can call them
U.S. lower middle class,
they still remain richer
than people in China, but they really had
very little growth.
And indeed this observation
is something that has
of course led some people in
the U.S. to actually blame
China and to blame the
roles of globalization
to have been too favorable to China
and to have essentially taken
jobs from the United States,
and sort of transplanted
them and sent them
over to Asia and to China in particular.
And then the third point which
is important in this graph
is the point of the global top one percent
where you actually notice very large gains
in relative percentage
terms, but even much more so
when we translate these
gains in absolute order,
so these are the people who actually had
during the period of
the high globalization
before the economic crisis
an extremely good time
and they have actually gained a lot.
So this is the picture of the world,
like the snapshot, as of
the global financial crisis,
and if I were to
summarize, I would say that
the globalization, and
technological change,
and policy decisions during
these 20, 20 plus years,
have been really very good
for the middle classes
in Asia, and for the
global top one percent,
call it the plutocrats, but
it was not a good period
for the middle classes
in the rich countries.
And this will be I think my last graph
if I now were to update,
as I recently did,
and it's in an unpublished paper,
that same graph pushing it to 2013,
the situation is little bit different.
As what you notice when you push the data
to 2013 and compare 2013 situation to 2008
is that you still continue
having significant gains
in the middle, again these
are the Asian countries
that we were talking
about, that you still have
absence of growth, or very meager,
very modest growth, for the middle classes
in the rich countries, but
that you now do not have
this really snout of the
elephant being so high
as it was in the time
of high globalization.
And why are the top one percent globally
not doing so well now after
the global financial crisis?
The reason is that the
global financial crisis
led to significant
losses in capital incomes
for the global top one percent
who are actually generally
people from the rich countries
in their top income distribution,
not only the top one percent, for example,
11% of the richest Americans belong
to the global top one percent,
and they didn't have good time,
or actually they didn't
have prosperous time,
after the financial crisis.
So the financial crisis was a big shock
from which they recovered
little bit later,
but it still remained a
shock compared to the gains
that kept being realized by
the middle classes in Asia.
So what used to be the
elephant graph is now
little bit different in 2013.
And very likely it would remain like this
after this crisis, because
what we can see now
with the Corona crisis is that
rich countries in the West
seem to have been affected
more than countries in Asia
on the assumption that
India does not get affected
as badly as the rich world,
and that would actually mean
that in the future we
might actually expect
a global graph to look more or less
like this particular graph,
which means really continued
gain for Asia and for the
middle classes in Asia,
and continued stagnation of incomes
for the middle classes
in the rich countries,
and not really significant recovery
for the global top one percent.
So let me stop here because
this is the last part
which is kind of speculative.
We obviously do not know what will be
the effects of the crisis,
but we can actually do
a little bit by sort of analogy
with what happened during
the global financial crisis
in order to understand
what will be the effects
of the coronavirus.
Thank you very much, and
I hope I would be able
to get in touch with you,
answer some questions,
and discuss these issues much more.
Thank you.
