The Globalization of Inequality

François Bourguignon

Paris School of Economics

Moscow, April 2012

1

"With globalization, rich people are

getting richer and poor people poorer"

Critiques of recent global development increasingly

bear on mouting inequality:

What is the evidence?

• At global level

• At national level

What are the causes of change?

What can be done ?

2

1. The evolution of global inequality

a) Definition and measurement

Statistical unit:

All individuals on earth (global distribution)

Country (population weighted or not)

Data

Income (consumption) :National Accounts (GDPpc or

Cpc)

Purchasing Power Parity correction (1990/2005)

Population: UN

Distribution data from household surveys (1985-2005)

3

4

The historical rise in global

inequality

Source: Bourguignon and Morrisson, 2002

5

The reversal in global

inequality trend

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

0.300

0.350

0.400

0.450

0.500

0.550

0.600

0.650

0.700

0.750

1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Gin

i co

eff

icie

nt

Global inequality: the 1990 trend reversal

80

/20

ratio

Source: Bourguignon, 2010

Evolution of global extreme poverty

(developing countries)

6 Source: World Bank

0

200

400

600

800

1000

1200

1400

1600

1800

2000

0

10

20

30

40

50

60

1980 1985 1990 1995 2000 2005 2010

Per

cen

ts

Year

Evolution of global extreme poverty (1.25$ ppp a day): 1980-2008

Proportion of poor people (left axis)

Number of poor people(right axis)

Remark 1: Inter- and Intra country global

inequality

7 0.000

0.100

0.200

0.300

0.400

0.500

0.600

0.700

0.800

0.900

1.000

1810 1830 1850 1870 1890 1910 1930 1950 1970 1990 2010

Th

eil

co

eff

icie

nt

Decomposition of global inequality into Between and Withincomponents (Theil coefficient)

Global inequality

International inequality

Inequality within countries

8

Remark 2: Inter-country inequality keeps

increasing

Evolution of global inequality:

summary

Historical explosion of global inequality since 1820

Confusing evolution in recent period :

Reversal in historical ascending trend in global inequality

… but divergence between rich and poor countries rises

Within country inequality is increasing (although almost

negligible effect in global inequality change)

Continuous drop in (absolute poverty)

Main drivers of these evolutions:

Asian growth

Poor growth performances in several African countries

Inequality increase in a number of countries 9

2. The unequalizing of national

income distributions

The widespread drop in the GDP labor share

Trend reversal of post-redistribution inequality in

developed countries

Increasing inequality in a number of emerging and

developing countries

10

The drop in the GDP labor share

11

Recent increase in inequality in

developed countries

12 -3 -2 -1 0 1 2 3 4 5 6

Spain

Ireland

France

Greece

Australia

Korea, Rep.

Denmark

Japan

Luxembourg

Belgium

Canada

Austria

Sweden

Netherlands

United States

Germany

Italy

Norway

United Kingdom

New Zealand

Portugal

Finland

Change in the Gini coefficient : mid 1980s to mid 2000s, developed countries

Percentage pointsSource: OECD

Top incomes in developed

countries: a trend reversal

13 Source: Top incomes

0

5

10

15

20

25

30

35

40

1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Pe

r ce

nts

Year

Share of top 5% income in total income: 1920-2009, selected developed countries

USA

UK

France

Sweden

Japan

Inequality change in developing

countries (excluding LAC)

14 -10 -8 -6 -4 -2 0 2 4 6 8 10

Kenya

Malaysia

Iran, Islamic Rep.

Algeria

Lesotho

Pakistan

Panama

Yemen, Rep.

South Africa

Moldova

Mongolia

Hungary

Madagascar

Slovak Republic

India rural

Tunisia

Morocco

India urban

Tajikistan

Vietnam

Mozambique

Slovenia

Indonesia

Philippines

Albania

China rural

Botswana

Ghana

Kyrgyz Republic

Poland

China urban

Change in the Gini coefficient : mid 1980s to mid 2000s,Other emerging and developing countries

Source: World Bank, Povcal

Inequality change in Eastern Europe and

Russia

15

0

5

10

15

20

25

30

35

40

45

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Pe

r ce

nt

Year

Recent evolution of inequality in Russia and some Eastern European countries (Gini coefficient)

Russian Federation

Poland

Slovak RepublicHungary

Inequality change in LAC countries

16 -8 -6 -4 -2 0 2 4 6 8

Brazil

Mexico

Guatemala

Guyana

Nicaragua

Honduras

Chile

Trinidad and Tobago

Venezuela, RB

El Salvador

Dominican Republic

Costa Rica

Colombia

Jamaica

Ecuador

Uruguay

Argentina

Peru

Change in the Gini coefficient : mid 1980s to mid 2000s,LAC countries

Percentage pointsSource: World Bank, Povcal

Top incomes in emerging countries:

a trend parallel to developed countries?

17 0

5

10

15

20

25

30

1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Pe

r ce

nts

Year

Share of top 1% income in total income: 1920-2009, emerging countries + USA

USAArgentina

India

China

Indonesia

Source: Top incomes

Possible causes of changes in

national income inequality levels

Globalization as an important driving factor Favorable to skilled labor, capital and natural resources in

most countries

Asymmetric causes between developed and developing

countries ??

Technical progress

Financial sector

Importance of country-specific factors: Domestic vs. foreign market focus

Human capital accumulation

Redistribution

Others (transition, fertility, labor market, …)

18

3. Policies to correct global inequality:

global level

Catching-up by emerging countries likely to continue

Concern about growing gap between poor and

emerging countries

International redistribution to the poorest countries

from rich and emerging countries through:

Official Development Assistance

Trade restrictions or preferences

Capital flows ( FDI - profit repatriation)

Migration

Technological transfer

19

Domestic policies

to control national inequality

The issue of protection

Justified to a limited extent in poor countries, but less and

less so in emerging countries

Increased protection by developed and emerging countries

likely to stop the global equalizing trend without correcting

inequality

Positive distributional impact of solid domestic

oriented growth

The key role of redistribution policies …

20

The key role of redistribution policies

Coordinated and more agressive tax policies in

developed countries

Development of taxing capacity and efficient social

protection in emerging countries

The spread of cash transfer programs as the proof that cash

redistribution is possible in developing countries

Financial development makes it easier to monitor individual

incomes and to tax them

Equalizing 'opportunities':

Human capital policies (Education, health care,..)

Taxing bequests

Fighting discrimination

21

Conclusion: domestic policies can reduce

inequality without impairing growth!!

22

520

540

560

580

600

620

640

1975 1980 1985 1990 1995 2000 2005 2010

Gin

i co

eff

icie

nt

* 1

00

Year

The trend reversal of inequality in Brazil: 1975-2009

Trend 1977-2002

Inequality

Conclusion: domestic policies can reduce

inequality without impairing growth!!

23

520

540

560

580

600

620

640

1975 1980 1985 1990 1995 2000 2005 2010

Gin

i co

eff

icie

nt

* 1

00

Year

The trend reversal of inequality in Brazil: 1975-2009

Trend 1977-2002

Inequality

-20

-15

-10

-5

0

5

10

15

20

520

540

560

580

600

620

640

1975 1980 1985 1990 1995 2000 2005 2010

Gin

i co

eff

icie

nt

* 1

00

Year

The trend reversal of inequality in Brazil: 1975-2009

Trend 1977-2002

Inequality

GDPpc growth rate

24

Thank you

25

Remark 1: Inter-country inequality keeps

increasing