National Vices, Global Virtue: Is the World Becoming More Equal?

You may find the answer surprising, but the most recent data show that the world as a whole is becoming more equal, driven by fast growth rates of China and India and slower growth rates in rich countries. A decrease in the US mean income from 2008 to 2011, for instance, makes global convergence of people’s incomes a lot easier to achieve. Specifically, the latest (2011) data show a global Gini of 67, two points lower than in 2008 and five points lower than what 1998/1993 data showed.

Now, this comes with some caveats. First, the household survey data underrepresents poor people in poor countries (8 percent of world population is missing), so our income inequality measures are almost certainly underestimates. Second, our surveys underrepresent the very rich who furthermore tend to underestimate their wealth. Third, large financial assets hidden in tax havens do not show in fiscal data or in household surveys, leading to further underestimating of inequality.

Despite these caveats (more on them and the calculations below), it is safe to say that despite concerns about inequality within nations, global inequality is on a modest decline. Similarly, despite concerns about the middle class in wealthy nations, a global middle class is emerging. Keep reading for details.

The data

These results are based on my new round of global inequality calculations, the seventh since my first paper on the topic in 2002. That paper included only two years: 1988 and 1993. Afterwards, in my book Worlds Apart, I added 1998. And then it went on with years 2002 and 2005 (discussed here), and finally with a panel of country/deciles created specifically for the paper I wrote with Christoph Lakner. In 2008 and 2011, all surveys (with the unfortunate exceptions of China in 2011 and Japan in both years) are based on micro data.

Until now, the data did not meet what I consider to be a global distribution (at least 110 countries and 90 percent of global population and GDP). It now (for 2011) covers 112 countries, 92 percent of the world’s population, and 90 percent of global GDP in current dollars. 

The calculations: Is global inequality on the decline?

In a paper that discussed changes in global inequality between 1988 and 2008, Christoph Lakner and I find a slight, but unmistakable, decrease in global Gini, from 72 points in 1988 and 1993 to 70.5 Gini points in 2008. These were panel data. On a more detailed sample for the benchmark year 2008, I find an even lower Gini of 69. So, the decline in global inequality of about 2 to 3 Gini points was already present during the first decade of the 21^st century.

The 2011 data show that the decline has continued. The 2011 global Gini is 67, some 2 Gini points lower than three years before. This is a remarkable change, driven, as before, by the fast growth rates of China and India, and between 2008 and 2011, also by the absence of growth in rich countries. The average real per capita income, calculated from Chinese household surveys, has increased by 45 percent between 2008 and 2011; in India, the increase was 11 percent. But now global inequality is decreasing also because the rich world is not growing. The US mean income in 2011 is lower than in 2008, making global convergence of incomes easier.

The caveats

In addition to our imperfect coverage of poor countries, global inequality is underestimated also, as mentioned above, by surveys’ non-inclusion of the very rich and, when they are included at all, by the underestimation of their incomes, especially of those derived from the ownership of capital. This has been a well-known issue for years but has become more serious because of globalization that allows people to move their assets more easily (we are speaking here of legally owned assets -- income which owners tend to “forget” when they fill survey questionnaires). When Christoph Lakner and I made some rough adjustments for the underestimate of top 1 percent of incomes, it turned out that almost all but one-half of a Gini point of global inequality decline dissipated. It could be that the global inequality decline is significantly less if we were to account better for the incomes of the very rich.

The third caveat is similar to the second. There are (we are now much more aware of this after the pioneering work by Gabriel Zucman) large financial assets that are not included either in fiscal or household survey data. This is money held in tax havens. Zucman estimates it at 8 percent of global financial assets. Information on income from these assets is extremely unlikely to be reported since even the legality of these assets (unlike those of the previous group) is questionable. Using some back-of-the envelope calculation, income from the assets “parked” in tax havens could amount to 0.7–1 percent of global GDP. Since it is very likely to be received by the global top 1 percent, we are thereby further underestimating global inequality.

The issue of the new 2011 PPPs

The Gini values I have provided so far are based on the Purchasing Power Parity (PPP) dollar exchange rates derived from the 2005 International Comparison Project (ICP). One of the reasons I chose to update my global inequality data for the year 2011 is that the new ICP was conducted in that year. When household surveys are conducted in the same year as ICP, domestic currency incomes are divided by PPP exchange rates which have also been calculated for that same year. One source of error, projection of PPPs to the year when the global ICP is not conducted, is thus avoided. The 2011 PPPs, as is by now well known, have resulted in some significant reassessment of price levels in Asian countries (Indonesia, India, China). As their price levels were found to be lower than previously thought, PPP exchange rates were reduced, and real incomes accordingly increased. (If country's price level is lower, then with the same nominal income, you can buy more goods.) In global inequality calculations, higher real incomes of China, India, and Indonesia (among the large countries) translate into reduced global inequality.

The effect of 2011 PPPs was essentially a level effect, meaning that the changes and the trend were left more or less unaffected while the level of global inequality was reduced throughout (that is, for all years) by about 3 Gini points. Thus, 2011 global inequality, measured in 2011 PPPs, is “only” 64 Gini points. 

The global middle class

In 2011, the emergence of the global “middle class” continues. If we take one of the definitions of the middle class, made popular by the World Bank’s work on Latin America, as people with incomes above $PPP10 per day and less than $PPP50 per day, 29 percent of world's population belongs to that group, and they control 43 percent of global income. In 1998, equally defined "middle class" included only 17 percent of world population. Unlike in 1988 and 1993, when global income distribution showed two peaks with high percentages of people among either the extremely poor or the very rich, today’s global income distribution is single-peaked with the “thickening” of the distribution around the middle. (Note however that the global median income of $PPP5.7 per day is still vastly below the minimum income that we use to define our “global middle class”.) 

The global top 1 percent

The global top 1 percent is still heavily dominated by the “old rich” OECD countries. There are just above 60 million people in the global top 1 percent. One-half of them are Americans; the richest 11 percent of Americans are the members of this “club” (If we look at the global 2 percent, the entire top quintile of the US income distribution belongs there). From other rich and relatively populous countries (Germany, France, Japan, Great Britain) 4–5 percent of the richest people belong to the global top 1 percent. Outside the “old OECD,” only Chile and Taiwan have more than 1 percent of their populations in the global top 1 percent. Brazil, South Africa, and Russia each have their own top 1 percent also in the global top 1 percent, but not more than that.

National vices, global virtue? 

There are two takeaway messages. The first is that while many national income and wealth inequalities are increasing, or are thought to be unacceptably high, global income inequality is charting a modest decline. This is not surprising because the bulk of global inequality depends on differences in mean incomes between rich and poor countries, and these are now less than at any time since the end of World War II. But for this trend to continue, fast growth rates of China and India are crucial. The second takeaway message is this: while many national middle classes in rich countries are being “hollowed out,” a global “middle class” is emerging. The shape of the world distribution has moved from being bipolar, with one peak of the distribution among the very poor and another among the rich, to being single-peaked with a more sizable concentration of people into something that may be called “the global middle class.”