What is happening with global inequality?

With domestic inequalities and “populism” taking center stage, the changes in global income inequality have understandably moved out of the focus. My access to the data—many of them still best obtained from the World Bank especially for poorer countries not covered by LIS—has also diminished since I left the World Bank. But one can still put together a quick update (thanks also to the contribution by Christoph Lakner) that covers the period up to 2013. One small technical point is worth making at the outset. When one compares, as I will do here, 2013 results with the past, going back to 1988, one faces the following choice: either (1) to use the best 2000-2013 numbers which are all based on detailed micro data and 100 percentiles of the population from each country, plus better income data from India, or (2) to compress these numbers into country-deciles to make them more comparable with the 1988 data (when indeed we had much less detailed information with many fewer fractiles). I decided here to go with the solution No. 2—but if I were to compare a more recent period only (say, after 2000), I would have preferred to use No. 1.

Do household survey data track reasonably well what we know from National Accounts? The answer is yes. The Figure below shows the average annual  global growth rates of GDP per capita and mean income from household surveys over five-year periods, all expressed in 2011 international dollars. The two blue lines move together reaching both the peak growth of about 3% per capita per annum (pc; pa) in the period prior to the Global Financial Crisis before dropping to only 1% pc pa in the next five years.  

 

But the striking and important thing is what we cannot see from National Accounts but can see from household surveys: the dramatic increase in the global median income (income at the 50^th global percentile). This positional income which reflects high growth rates of the relatively poor populations in Asia (China, India, Vietnam, Indonesia etc.) has throughout the past 25 years always increased faster than the global mean income, and in the most recent period (2008-13) the gap between the median and mean growth has soared: the median income went up by an average rate of 6% pc pa while the mean income grew by only 1%.

The shrinkage of the distance between the mean and the median is often taken as an indicator of reduced inequality (for asymmetric distributions). And this is indeed the case here. In 1988, the mean per capita income of the world was just over $PPP 4000 and the median just over $PPP 1000; a quarter-century later, these amounts were respectively $PPP 5500 and $PPP 2200. So the mean-to-median ratio has decreased from 4-1 to 2.5-1. The global Gini coefficient went down from 0.69 to 0.62; the global Theil index from 0.92 to 0.73. Most of the decline took place in the last five-year period. By 2008, the global Gini was 0.67, just slightly below its value at the time of the fall of the Berlin Wall. What happened after 2008 was the slowdown or negative growth of rich countries and continued fast growth of Asia, combined with the absence of further within-national increases in income inequality in big countries like China, Russia, UK and Brazil. Even in the United States, income inequality went down as the result of the shock to highest incomes during the crisis, before shooting back again after 2013 (the period not covered here though).

Does this mean that everything is fine? Not really. Measures of inequality such as the mean-to-median ratio or the top 1% share are fragmentary: they take into account only what is happening at two points of the distribution. Synthetic measures like the Gini are, in that sense, better (because they take into account the entire distribution) but they compress all that information into one number. To get a better sense of what is happening we want to look at various parts of the distribution and at various measures.

Let me give two examples. The growth of the median, which is, as we have just seen, a very good and encouraging development, has its other facet: it leaves behind those below the median whose incomes do not grow as fast as the median. If we take, for example, the income level equal to ½ of the median, which is often used as a measure of relative poverty or inequality, then we note that the number of people below that income level has increased by 300 million and the percentage of the global population falling short of ½ of the median has barely changed (see Figure below). It used to be 28% of the world population in 1998, it is 26% now.

The share of income received by the global 1% has also, despite the shrinkage of global inequality, remained unchanged. In 1988, its share was 11.3%; it then increased to around 13.5% in 2003 and 2008 before going back to 11% as the crisis struck the rich economies which “supply” most of the people in the global top 1%. Given that we are probably missing an increasing number of the super-rich or that they are hiding their assets more than in the past, it is very likely that the true share of the top 1% has even increased.

We thus have only apparently paradoxical developments over the past 25 years: on the one hand, strongly rising global median income and the shrinkage of global inequality when measured by the synthetic indicators like the Gini or Theil; but, on the other hand, the rising share of the global top 1% and increasing number of people in relative poverty (mostly in Africa).  The last point opens up again the vexed question of lack of convergence of Africa and its growing falling behind Asia (and of course the rest of the world).

So, is the world becoming better, as Bill Gates wants us to believe? Yes, in many ways, it is: the mean income in 2013 is almost 40% higher than in 1988, and global inequality is less. But is there a bad news too? Yes: the same share of the world population is being left behind and the top 1% are getting ever further away and richer than everybody else. So, we have, at the same time, the growth of the global “median” class and an increase in world-wide polarization.

Stan wojenny: My memories of the (post) Martial Law

When several days ago I ran into a Polish bar tender(ness) in a restaurant in New York and she told me she was born in 1981, I, wanting to impress her, pronounced these two Polish words “stan wojenny” (the state of war). They brought in a veritable surge of memories.

My interest for Poland began with the Solidarity movement in 1980. The movement was extremely important. It was a movement for the true independence of Poland, and it was supposed to have never happened in a socialist country: workers standing up, in millions, against a workers’ state! The evolution of Solidarity from its legalization, the many conflicts with the authorities, and the eventual ban as well as the turmoil within the Polish United Workers’ Party (Gierek, Kania, Jaruzelski) was covered very well in the Yugoslav press. Perhaps it was one of the best and most detailed coverages of any foreign event. It was discussed better than in the mainstream US magazines like Time and Newsweek.  At that time, I read a lot about Poland, attended discussion seminars, started to study the language, and was helped  by a close friend who had personal ties to Poland.  

Fast forward to 1987 when I began to work as a country economist for Poland in the World Bank.

For the background, it is important to know that Poland became World Bank/IMF member in 1980 and then in 1981, after the Martial Law was declared, it defaulted to the Western club of public creditors. The country’s GDP dropped precipitously in both 1980 and 1981, the West imposed economic sanctions, the country did not export much to gain foreign currency anyway, and the default ensued.

The World Bank could not technically lend to Poland under such conditions even if the real reason was political. Poland was probably, within the World Bank, the most closely "monitored" (controlled) country by the US Treasury. The World Bank could do only economic work but no lending. The Polish government, being keen on having relations with the IMF and the World Bank, and hoping that they might ultimately lead to the softening of Western sanctions and rescheduling of the debt, was most forthcoming. Unlike many governments that would drag their feet, here was a government happy to talk to you.

But it was also a government that could do almost nothing. It was hemmed in internally by being in conflict with its “society”. It was unable to introduce a stabilization program that would lead to a severe decline in real wages. Externally, it could not renegotiate the debt. Finally, it could not move on some issues like privatization because this was ideologically unacceptable and it was not clear how the Soviets would look at it. The government nevertheless launched a stabilization program, named after a technocratic deputy Vice Premier, Professor Sadowski. It was a program of which the later famous Balcerowicz plan was a carbon-copy. But the Sadowski program failed because it could not politically push real wages down; it lacked political legitimacy and could not overcome the external constraint.

The Polish government and its agencies were totally technocratic. This was very different from Yugoslavia where its home-grown system of “socialist workers'  management”, complete with complicated ideological “baggage”, made the government thoroughly ideological. In Poland, the communist ideology was dead--since 1968. Only the language of technocracy existed.

Poland was much freer in the post-Martial Law than the Soviet Union without it. Political discussions in Poland were remarkably open. There were good books and good newspapers. I was able to read tolerably well Polish at the time and I recall how impatiently I would wait for the weekly publication of Polityka which always carried good sociological and political articles. These were much more interesting discussions—to my mind—than those in Yugoslavia at the same time. Yugoslavia was entirely “nationalized”: every issue was considered through the prism of nationalism: is it good for the Serbs, Croats etc. In Poland, which due to the Holocaust and ethnic cleansing of the Second World War, was 99% ethnically and religiously homogeneous, the issues were political not ethnic.

It was also a very “civilized” country. One small event stands out in my memory. On a Saturday night, there was a rowdy crowd of young people drinking in the main square in Warsaw. Two policemen approached the drinking crowd. Before policemen asked them for IDs, they politely lifted their hands to their hats and saluted. I thought: “Incredible. Where else would you see policemen saluting an angry drunk crowd of young men”.

Prices were totally out of whack. Just before taking a train to go to Krakow I bought a couple of bananas. The two bananas cost as much as my 300 kilometers’ journey. In a market economy, you would have to pay about 200 bananas for the trip. So relative prices (in this case) were off by a factor of a hundred. Subsidization, which in those days amounted to about 15% of GDP, meant that exports had to be protected: every foreign sale of subsidized goods was a domestic loss. It was a topsy-turvy economy. The newspapers spoke of East Germans who would travel to Poland to buy subsidized food. Custom officials were directed to search cars and stop the outflow of goods.

At times comical scenes ensued. Western goods (rare as they were) were purchased by state import companies using the foreign exchange obtained at the official rate: say, 1 zloty for 1 dollar. They would then sell the goods (e.g., Italian shoes) at that price plus 20% mark-up. They would buy Italian shoes for $100 dollars (100 zloty), add 20 zloty mark-up and sell them for 120 zloty. But 120 zloty at the officially tolerated black market rate was only $30! So people, including foreigners, and my World Bank co-workers,  would—whenever the rumors spread that Western goods had arrived—run into these stores and buy Italian shoes at ridiculously low prices.

A system like this could not function much further: wrong prices led to individually rational, but socially dysfunctional, decisions; subsidies could not be financed any more, and the system had to be autarkic in order to protect itself.

On December 13, 1987, exactly six years since the morning when my mother woke me up, all panicky, to tell me that Jaruzelski had proclaimed the state of war in Poland, I walked on a snowy evening around the downtown Warsaw. Everything was quiet and the only thing I could hear was the crackling sound of snow under my shoes. The “normalization” looked perfectly immutable. Even the demonstrations on that day were small and were easily dispersed.

And yet, some thirty years later in New York, the Polish waitress would only dimly remember these words: “stan wojenny”.

The world has changed.