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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.
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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.
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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.
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The recent fall in income
inequality is due mainly to globalization.
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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
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Globalization
reduces inequality
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Globalization
increases inequality
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Institutions
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World
Trade Organization, International Monetary Fund,
Wall St Journal.
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UN
Development Program (UNDP)
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Important
papers
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Sala-i-Martin
2001, Dollar and Kraay (2001)
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Milanovic
1999,
UNDP (2002)
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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. |
