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Debate about Income Inequality
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Is Global Income Inequality Increasing or Decreasing?

A Confident Assertion of Falling Inequality
The September 2004 issue of the prestigious American Journal of Sociology carries an article entitled ‘Accounting for the Recent Decline in Global Income Inequality’ (Firebaugh and Goesling 2004) arguing that global income inequality has declined in recent decades as a result of economic globalization. Firebaugh and Goesling’s main arguments revolve around rapid industrialization in the densely populated regions of China and India.

This is the abstract for Firebaugh and Goesling’s article:

Following nearly two centuries of growth, global income inequality declined in the last decades of the 20th century. To determine the causes of that historic decline, we focus on income inequality across nations and find that the major equalizing force is faster-than-world average income growth in China and South Asia, industrializing regions where 40% of the world’s people live. Apparently what matters most about economic globalization thus far is its role in the spread of industrialization throughout populous poor regions of the world. If so, then globalization most likely has reduced global income inequality. This decline is anticipated to continue over the next few decades, first, because of the continued industrialization of poor regions and, second, because most of the growth in the world’s working-age population will occur in poor regions.

Atlas users with access to the online version of the AJS can read the full article at: http://www.journals.uchicago.edu/AJS/journal/issues/v110n2/080300/080300.web.pdf

The argument that globalization has already significantly reduced world income is a significant break from earlier thinking. The Atlas of Global Inequality asked Robert Wade of the London School of Economics, a notable contributor to debates about global inequality (Wade 2004, 2001), to respond to Firebaugh and Goesling’s asssertions. A summary of his comments are given below. The full text of his comments can be downloaded at: http://repositories.cdlib.org/cgirs/.

Firebaugh and Goesling’s Four Major Claims
In his analysis of Firebaugh and Goesling’s paper, Wade identified their four major claims, summarized below.

  1. Global income distribution (including both the income distribution between and within countries) has become more equal since about 1980. Prior to that inequality rose for nearly two centuries.
  2. Rising inequality occurs mainly from differences in average country incomes, and the fall since 1980 is primarily due to rising average incomes in China and India.
  3. The recent fall in income inequality is due mainly to globalization.
  4. Continued industrialization of the global south and demographic change will prolong falling inter-country inequality for several decades. So, those concerned about inequality should argue for more globalization, not less.

This web page summarizes Wade’s analysis of Firebaugh and Goesling’s first two claims. The crux of Wade’s criticisms focus on both the methodologies used to measure global inequality as well as how such datasets are interpreted.

Problems with these Claims
Wade’s comments on the first two of these claims. He writes:

One admires the confidence with which they advance this argument, as in the opening declaration, “Following nearly two centuries of growth, global income inequality declined in the last decades of the twentieth century”. No ifs or buts, not here and not in the rest of the long text, where they describe their conclusion as “fact” and the claim that the trend was in the opposite direction as “myth”.

Sadly, Wade argues, this claim is not supported by other analyses, and cannot be asserted with the confidence of Firebaugh and Goesling’s paper.

Wade shows that Firebaugh and Goesling’s conclusion of falling inequality is sensitive to a series of choices about measures (how incomes are compared, populations weighted, inequality measured) and data (based on national income accounts or household surveys). When alternative choices are made, global income inequality may increase rather than decline.

Has Global Income Inequality Declined?
Wade writes:

The authors cite several studies in support of their starting point, that global income inequality is lower today than it was two decades ago”. It is unfortunate that they take these studies at face value, without mentioning the substantial critiques that have been made of them. For example, they rely heavily on the studies by Bhalla and Sala-I-Matin, taking them at face value. Branko Milanovic (2002), Martin Ravallion (2003, 2004), among others, have shown why Bhalla and Sala-I-Matin should not be taken at face value.

Wade sites a series of studies giving different results, classifying them according to methodological choices they made. Studies using a different measure of Purchasing Power Parity (PPP) come to a different result. Figure 1 (from Sutcliffe 2003) shows one such result. In this case (and in several others), the exclusion of China from the measure of inequality reverses the direction of inequality. This suggests that falling inequality is not a general property of the world economy.

Studies using a ratio to show polarization, as in Figure 2 (also from Sutcliffe 2003), also do not support Firebaugh and Goelings’s claim that the South is catching up with the North.

Source: Bob Sutcliffe, 'World Inequality and Globalization', Oxford Review of Economic Policy, Vol 20, No. 1, 2004, based on Angus Maddison, The World Economy: Historical Statistics, OECD, Paris, 2003

Firebaugh and Goesling overlook inequality within countries, arguing that internal inequality matters less than inequality between countries. However, Wade argues that internal inequalities are widening, so Firebaugh and Goesling’s omission may be important.

Firebaugh and Goesling base their conclusions on data from national income accounts (GDP per person) rather than on direct surveys of household income and consumption. The one major study (Milanovic 2000) using household survey data shows income inequality increased between 1988 and 1993, then fell slightly from 1993-98. Wade writes ‘It is odd that F&G do not engage with the Milanovic results.’

On the trend of income inequality, Wade writes:

In short, there are many reasons to be cautious about accepting Firebaugh and Goesling’s claim, “Mounting evidence indicates … that global income inequality is lower today than it was two decades ago”.

In his paper, Wade identifies what he believes are important methodological problems underlying Firebaugh and Goesling’s claim that global income inequality is decreasing:

At the least we have to (a) acknowledge evidence to the contrary, (b) explain why the counter evidence is not to be counted, and (c) acknowledge that even by the measures and data sources that show falling overall inequality, the result depends mostly on China.

Additional Discussion

There is growing debate about globalization. It is occurring in many locations, most obviously in the streets of cities hosting the meetings of the World Trade Organization, International Monetary Fund and other global institutions. These street protests have some correspondence with discussions occurring in universities and governments, and in factories, homes and fields.

One important part of the debate about the interpretation of globalization concerns global income inequality. In this section of the debate, the question is whether income disparities are rising or falling. In other words, does global integration make the poor richer or poorer? The two sides of this debate are roughly as follows:

Some points in the debate

 

Globalization reduces inequality

Globalization
increases inequality

Institutions

World Trade Organization, International Monetary Fund, Wall St Journal.

UN Development Program (UNDP)

Important papers

Sala-i-Martin 2001, Dollar and Kraay (2001)

Milanovic 1999,
UNDP (2002)

 
A distinction is made between aggregate national income data and direct household income and expenditure surveys. Aggregate national income, for example gross domestic product per capita, is calculated from statistics of economic activities and population. This sort of statistic is, therefore, not a direct measure of income or poverty, and does not reflect differences between rich and poor. It is an average of national income. It can be used to measure international  income differences, that is, differences in average incomes among countries. The graph" Global disparities of income - are regions closing the gap" reprinted in the Income Inequalities page (from UNDP 2002), is an example of a comparison of international incomes using GDP/capita.

Household income and expenditure surveys involve attempts to directly measure what income people have. Data from household surveys can show differences between rich and poor in a country and can provide more reliable estimates of income and poverty. Until recently, these surveys were too few and too localized to use in international comparisons.

Milanovic (1999) put together data on a global scale using household surveys. Analysis of this data showed: " an important increase in inequality [from 1988 to 1993] caused by slower growth of rural incomes in populous Asian countries compared to the rich OECD countries, as well as by rising urban-rural income differences in China, and by declining income in transition countries."

Sala-i-Martin has generated considerable media interest with a paper (Sala-i-Martin 2001) which suggests that income inequality is actually falling. He has generated a different data set based on aggregate income and estimates of within country distributions of income between rich and poor. This data set suggests that global income inequalities were falling in the 1980s and 1990s. 

An article in the Boston Globe (2003) provides an overview of the Milanovic and Sala-i-Martin papers.

What's important -- interim conclusion

This debate has considerable interest. New data sets are being generated, and new analyses undertaken, which promise greater clarity about global income inequality. There are, however, at least two ways in which this debate may miss the point. Firstly, the scale of contemporary global inequalities is so large that small changes in inequality are neither here nor there. Secondly, income is only one element of poverty; ill-health, powerlessness and exclusion, and many other factors, are also important.  Below, we explain the first of these points.

In an article on "How to judge globalism," Amartya Sen makes this point about the debate:

"Even if the poor were to get just a little richer, this would not necessarily imply that the poor were getting a fair share of the potentially vast benefits of global economic interrelations. It is not adequate to ask whether international inequality is getting marginally larger or smaller. In order to rebel against the appalling poverty and the staggering inequalities that characterize the contemporary world--or to protest against the unfair sharing of benefits of global cooperation--it is not necessary to show that the massive inequality or distributional unfairness is also getting marginally larger. This is a separate issue altogether."

So, Sen is suggesting that " globalism" should be judged not by small changes in income inequality but by its ability to provide the poor with a fair share of growing world resources.

Further research in this area can be found at: http://www.gapresearch.org/.

References

Firebaugh, G. and B. Goesling (2004). "Accounting for the Recent Decline in Global Income Inequality." American Journal of Sociology, Volume 110 (Number 2 (September 2004)): 283–312.

Milanovic, B. “The Ricardian vice: why Sala-I-Matin’s calculations are wrong”, typescript, Development Economics Research Group, World Bank, 2002, available www.ssrn.com..

Milanovic, B. (2002). True world income distribution, 1988 and 1993: First calculation based on household surveys alone, Economic Journal`112, 476.

Ravallion, M. 2003 “The debate on globalization, poverty and inequality: why measurement matters”, Policy Research Working Paper 3038, World Bank,;

Ravallion, M. 2004 “Competing concepts of inequality in the globalization debate”, PRWP 3243, World Bank.

Sutcliffe, B. 2004 'World Inequality and Globalization', Oxford Review of Economic Policy, Vol 20, No. 1.

Wade, R. (2004). "Is Globalization Reducing Poverty and Inequality?" World Development 32(4): 567-589.

Wade, R. (2001). "Winners and Losers." The Economist(April 26th).


Secor, Laura (2003) 'Mind the gap: the debate over global inequality heats up'. Boston Globe, January 5th, pD1, section: Ideas.

Dollar, D. and A. Kraay (2001). "Trade, growth and poverty." Finance & Development.

Milanovic, B. (1999). "True world income distribution, 1988 and 1993: First calculation based on household surveys alone", World Bank.

Sala-i-Martin, X. (2001). The Disturbing "Rise" of Global Income Inequality. http://www.columbia.edu/~xs23/papers/GlobalIncomeInequality.htm.

Sala-i-Martin, X. (2002). The World Distribution of Income (estimated from Individual Country Distributions). New York, Columbia University.

Sen, A. (2002). "How to judge globalism." American Prospect.

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updated 6/17/03
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