Global Income Inequality

The new issue of The Economist has a good in-depth examination of global income inequality. A subscription is required to read the whole thing, but the main conclusions of the article are: it’s difficult to know what’s happened to inequality around the world, because data is so poor, and depending on exactly how you measure things you can get completely opposite results; one thing that does seem clear is that an unprecedented number of people around the world have moved out of poverty over the past 20 years, primarily in East Asia and India; and another thing that seems clear is that there are places in the world where poverty seems utterly intractable and hasn’t gotten better at all, primarily in Africa.

Here are a few excerpts:

Is economic inequality around the world getting better or worse?

CRITICS of capitalism are convinced that the gap between rich and poor is widening across the world. For them, the claim amounts almost to an article of faith: worsening inequality is a sure sign of the moral bankruptcy of “the system”. Whether rising inequality should in fact be seen as condemning capitalism in this way is a question worth addressing in its own right. There are reasons to doubt it. But it would also be interesting to know the answer to the narrow factual question. Is the familiar claim that capitalism makes global inequality worse actually true?

Unfortunately, this apparently straightforward question turns out to be harder to answer than one might suppose.

Addressing this point, they quote Angus Deaton, one of the smartest economists I’ve ever met and probably the most knowledgable person in the world regarding the measurement of income and consumption:

Mr Deaton notes that a plethora of new data has so far failed to resolve this issue “because the new sources are mutually contradictory”. Summing up, he states: “If the surveys are wrong, and the national accounts right, either inequality has been widening in ways that our data do not appear to show, or poverty has been falling more rapidly than shown by the dollar-a-day counts. If the surveys are right, there has been less growth in the world in the 1990s than we are used to thinking.”

The following chart from the article illustrates another aspect of the difficulty in answering the question. The top panel shows that, between 1980 and 2000, richer economies (those with higher GDP per capita in 1980, measured along the horizontal axis) grew faster on average than poorer economies. But the bottom panel shows that if you weight countries by population, then you get the opposite result.

One of the conclusions of the piece is something that I feel very strongly about: if we want to help the world’s poor, the best way would be to remove more of the US’s trade barriers:

But what of the fear that global capitalism is making progress at the expense of the poor? The true figures would probably be quite reassuring on this—but even if the more pessimistic official figures were correct, it would be worth questioning the conclusions that the anti-globalists draw from them. If poverty was proving as tenacious in the face of growth as the Bank’s estimates say, would it make sense to blame global capitalism for that?

Hardly. On any estimate, poverty is at its most impervious in sub-Saharan Africa. Look again at charts 1 and 2. The countries of sub-Saharan Africa are represented by the white circles. These are not just the poorest countries in the world, but also the slowest-growing. Can it be plausibly claimed that these countries are the victims of globalisation? That would be an odd conclusion, given that sub-Saharan Africa’s economies are so comparatively isolated from the rest of the world economy—by force of history, circumstance and, to a large extent, the policies of their own and other governments. Sub-Saharan Africa plainly suffers not from globalisation, but from lack of it. The focus of attention should be on how to extend the benefits of international economic linkages to the region. Removing every rich-country barrier to trade with these countries would be an excellent place to start.