reigniting the inequality debate
Source Michael Perelman
Date 01/05/08/19:03

This article gives a nice summary of some of the issues in
measuring inequality.

Wade, Robert. 2001. "Winners and Losers." The Economist (28
Global inequality is worsening as the distribution of income
becomes more unequal.
The answer to what is happening to world income distribution
turns out to depend heavily on whether countries are weighted by
population, and whether income in different countries is measured
in PPP terms or by using actual exchange rates. If countries are
treated equally (not weighted by population) and average income
is measured in PPP terms, most studies find that world income
distribution has become more unequal in the past few decades. If
countries are weighted by their populations (so that China's
change in average income counts for many times more than
Uganda's), the world's PPP income distribution over recent
decades shows little change.
When incomes in different countries are compared using actual
exchange rates, the evidence shows that world income distribution
has become much more unequal over the past several decades, and
that inequality accelerated during the 1980s, whether countries
are treated equally or weighted by population. When incomes are
compared using PPP calculations, the degree of inequality
shrinks, and so does the rate of widening.
Many assume that PPP measures are always superior. Certainly the
exchange rate is a flawed measure of purchasing power: it fails
to reflect the large amount of non-monetary exchange in
developing countries, or money payment for services that are not
subject to international competition. Also, exchange rates are
much affected by capital flows and by monetary policy.
But PPP measures have their drawbacks as well. Different methods
of measuring purchasing-power parity, all plausible in
themselves, yield different results. Comprehensive estimates of
PPP incomes for developing countries, based on actual data on
prices of comparable goods and services, go back only to the
1970s. This makes longer-run analysis difficult. Finally, incomes
based on actual exchange rates may be a better measure than PPP
of relative national power and national modernity--matters of
more interest to sociologists and political scientists, no doubt,
than to economists.
In any event, the bulk of the evidence on trends in world income
distribution runs against the claim that world income inequality
has fallen sharply in the past half-century and still faster in
the past quarter-century. None of the four approaches supports
that idea.
Two very recent studies based on new data challenge the finding
that world PPP-income distribution weighted by countries'
population shows little change over the past few decades. The new
studies show, on the contrary, a rapid rise in inequality.
These new studies differ from the others in being based solely on
household income and expenditure surveys. The earlier ones either
used average GDP, ignoring inequality within each country, or
used indirect methods to estimate within-country inequality,
including production surveys and revenue surveys, which typically
miss important components of household incomes. Branko Milanovic
at the World Bank assembled the database, using the Bank's
formidable statistical organisation to obtain household survey
data from just about all the Bank's members, covering 85% of the
world's population, for the years 1988 and 1993. The result is
probably the most reliable data set on world income distribution.
Then Mr Milanovic computed the Gini coefficient for world income
distribution, combining within-country inequality and
between-country inequality, and measuring it in PPP terms. (The
Gini coefficient is a commonly used measure of inequality: 0
signifies perfect equality, 100 means that one person holds all
the income.) The results are startling. World inequality
increased from a Gini coefficient of 62.5 in 1988 to 66.0 in
1993. This is a faster rate of increase of inequality than that
experienced within the United States and Britain during the
1980s. By 1993 an American on the average income of the poorest
10% of the population was better off than two-thirds of the
world's people.
The other new study, by Yuri Dikhanov and Michael Ward, uses the
same data set with a different methodology. It confirms that
world income distribution became markedly more unequal between
1988 and 1993. Like the Milanovic study, it finds that the Gini
coefficient increased by about 6%. It finds, further, that the
share of world income going to the poorest 10% of the world's
population fell by over a quarter, whereas the share of the
richest 10% rose by 8%. The richest 10% pulled away from the
median, while the poorest 10% fell away from the median, falling
absolutely by a large amount. In short, we have to revise cell 4.
World PPP income distribution with countries weighted by
population (and China and India split into urban and rural)
became "much more unequal" between 1988 and 1993 (see table 3).
Why has global inequality increased? The answer is in four parts:
(1) faster economic growth in developed OECD countries than
developing countries as a group; (2) faster population growth in
developing countries than in OECD countries; (3) slow growth of
output in rural China, rural India, and Africa; and (4) rapidly
widening output and income differences between urban China on the
one hand, and rural China and rural India on the other. The
income of urban China grew very fast during 1988-93, which
reduced the gap between China's average income and that of the
middle-income and rich countries, and so reduced the world Gini
coefficient; but the widening gaps between rural China and urban
China and between urban China and rural India increased world
inequality by even more.
These trends in turn have deeper causes. Technological change and
financial liberalisation result in a disproportionately fast
increase in the number of households at the extreme rich end,
without shrinking the distribution at the poor end. Population
growth, meanwhile, adds disproportionately to numbers at the poor
end. These deep causes yield an important intermediate cause that
makes things worse: the prices of industrial goods and services
exported from high-income countries are increasing faster than
the prices of goods and services exported by low-income
countries, and much faster than the prices of goods and services
produced in low-income countries that do little international
These price trends mean that the majority of the population of
poor countries are able to buy fewer and fewer of the goods and
services that enter into the consumption patterns of rich-country
populations. The poorer countries and the poorer two-thirds of
the world's population therefore suffer a double marginalisation:
once through incomes, again through prices. Hence the figures in
table 3, which show that the gap between the richest 10% of the
world's population and the median is widening, and the gap
between the median and the poorest 10% is also widening.
Income divergence helps to explain another kind of polarisation
taking place in the world system, between a zone of peace and a
zone of turmoil. The regions of the wealthy pole show a
strengthening republican order of economic growth and liberal
tolerance (except towards immigrants), with technological
innovation able to substitute for depleting natural capital. The
regions of the lower- and middle-income pole contain many states
whose capacity to govern is stagnant or eroding, mainly in
Africa, the Middle East, Central Asia, Russia, and parts of East
Asia. Here, a rising proportion of people find their access to
basic necessities restricted at the same time as they see people
on television driving Mercedes cars.
It is remarkable how unconcerned the World Bank, the IMF and
other global organisations are about these trends. The Bank's
World Development Report for 2000 even said that rising income
inequality "should not be seen as negative" if the incomes at the
bottom do not fall and the number of people in poverty falls.
Such lack of attention shows that to call these world
organisations is misleading. They may be world bodies in the
sense that almost all states are members, but they think in
state-centric rather than global ways. They neglect not only
matters of world income distribution, but also world inflation,
world exchange rates, and world interest rates; and, in the case
of the World Bank, the global environmental issues of the oceans,
the atmosphere, and nuclear waste.

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