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Social Indicators Research

Erschienen in:

04.01.2016

The Rising Tide of Absolute Global Income Inequality During 1850–2010: Is It Driven by Inequality Within or Between Countries?

verfasst von: Thomas Goda, Alejandro Torres García

Erschienen in: Social Indicators Research | Ausgabe 3/2017

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Abstract

This paper is the first to decompose absolute global income inequality into its within-country and between-country component. The results show a continuous increase of absolute global inequality during 1850–2010, which can be separated into three distinct phases: (1) between 1850 and 1929, within-country inequality explained up to 76 % of absolute global inequality, yet the growth rates of within- and between-country inequality were very similar; (2) a sharp increase in the importance of between-country inequality occurred during the 1929–1950 period, which was followed by a period during which the within- and between-country components were approximately equally relevant; and (3) after 1985, the growth in absolute global inequality was driven primarily by the accelerated growth of within-country income differences. Currently, within-country inequality explains 70 % of absolute global market inequality, a figure close to that of the year 1850. Additional findings include that absolute income convergence between countries took place after 2005, that it is possible to reduce absolute inequality and to grow simultaneously, and that recently within-country net inequality has grown faster than market inequality. The main findings are preserved when different absolute decomposable inequality measures, sample sizes, and purchasing power parity exchange rates are used.

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Suppose that a country has two citizens who have incomes of $1000 (A) and $100,000 (B). If the income of both grows by 10 %, the new income of citizen A is $1100, and that of citizen B is $110,000. The proportional income difference between the two remains constant (B has still 100 times more income than A), but the absolute gap between the two incomes increased by $9900.

Note that also from a technical perspective, absolute indices are as good inequality measures as relative indices (see Kolm 1976).

Market income is pre-tax and pre-transfer income, whereas net income considers tax payments and transfer receipts.

SYM means that the index is invariant with respect to the reordering of incomes. POP means that the value of the index does not depend on the population size. NOM means that the index is non-negative and that it has the value of zero only under the condition that all incomes are equal.

CON refers to continuity: for all $n \in N, I^{n}$ is a continuous function. Bosmans and Cowell (2010) show that $I_{\theta }^{n}$ and $I_{V}^{n}$ are the only class of absolute decomposable inequality measures, even when the CON property is absent.

The variance has the additional advantages that it fulfills the Shorrocks and Theil criterion, that it is easy to compute, and that it can be interpreted as a measure of deprivation (Chakravarty 2001).

Ventile shares are frequently used in the literature; they allow for relatively exact inequality estimates when income differences within income share groups are not taken into account (see e.g., Davies and Shorrocks 1989; Milanovic 2012b). Each population ventile represent 5 % of the population. The ordering and grouping of the population takes place according to their income. (The lowest ventile represents the poorest 5 % of the population, etc.). Please note that our results are robust when decile or quintile shares are used instead of ventile shares.

It is a common procedure in global inequality studies to use GDP per capita in PPP and not in market exchange rates [see Anand and Segal (2008) for a discussion of the reasons].

“The literature suggests that when the whole distribution is covered, the log-normal is to be preferred [and] on average the difference between an assumed log-normal and a Pareto distribution [is] limited” [van Zanden et al. 2014, pp. 4–5 of their data appendix; see also Soltow (1998) and Lopez and Servén (2006)].

To verify that this method produces estimates that fit the existing income share data well, we compared our estimates with readily available income share data from the WDI database (see the “Appendix”).

When Solt’s database reports a Gini coefficient for a country in a benchmark year, this coefficient is taken for that year. Otherwise, we use either the Gini coefficient that was reported one year before or after the respective benchmark year, or when data for both years are available, the mean of the these two Gini coefficients is used.

Australia, Belgium, Brazil, Canada, Chile, China, Colombia, Czechoslovakia, Denmark, France, Germany, India, Indonesia, Ireland, Italy, Japan, Mexico, the Netherlands, Norway, Peru, the Philippines, Poland, Portugal, Russia, Spain, Sweden, Switzerland, Thailand, the United Kingdom, and the United States.

To ensure a maximum amount of core countries, we imputed some data (see Table 6 in the “Appendix”).

The 1980 estimates from the recent and historical series are nearly identical because (1) the same GDP per capita data are used for both series, (2) the population data from Maddison and WDI are very similar, and (3) the market Gini data from van Zanden et al. (2014) and SWIID are similar for many countries.

Anand and Segal (2014) also use ‘absolute versions’ of the Theil L and Theil T indexes to measure changes in absolute global inequality, that is, the mean income of a given year multiplied by the respective relative Theil L and Theil T index. Both Theil measures report the same trend changes as the absolute Gini index. Please note that these indices are not in line with the formal definition presented on p. 5.

GDP per capita in the core group of countries grew, on average, approximately 22 % between 1929 and 1950.

In approximately 60 % of the core group of countries, the Gini coefficient declined by more than 5 Gini points, and in approximately 30 % of the core group countries, the decrease was more than 10 Gini points.

Several studies report a slight increase in global inequality during recent decades (e.g., Milanovic 2005, 2013; van Zanden et al. 2014), whereas others report a significant decline (e.g., Sala-i-Martin 2006; Pinkovskiy and Sala-i-Martin 2009). See Anand and Segal (2008) and Goda (2013) for in-depth discussions of these inconclusive results.

Van Zanden et al. (2014) estimate that in 2000, approximately 70 % of relative global inequality could be explained by between-country inequality, and Milanovic (2012a, p. 125) finds that currently, “more than 80 % of global income differences is due to large gaps in mean incomes between countries”.

Net income inequality can be calculated only with for the recent data series due to data availability.

During the entire period, market income inequality grew approximately 3.3-fold, whereas net inequality grew approximately 3.5-fold.

Between-country inequality is not affected when net income shares are used instead of market income shares [see part one of (5) in Sect. 2].

These findings indicate that the exponential index $I_{\theta }^{n} \left( x \right)$ is sensitive to relatively small changes of the subgroup weight $\theta$ (an observation that was also made by Chakravarty (2001)).

For this calculation, only GDP per capita and population data are needed, which are available for many more countries each year than are the Gini coefficients.

This finding is consistent with Bosmans et al.’s (2014) results. Bosmans et al. show that absolute between-country inequality increased during the period 1980–2009. However, they find evidence only for an increase between 1980 and 2005, and their estimates suggest that absolute inequality subsequently decreased.

Argentina, Bangladesh, Brazil, China, Costa Rica, Dominican Republic, Honduras, Indonesia, the Philippines, Poland, Tunisia.

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Titel: The Rising Tide of Absolute Global Income Inequality During 1850–2010: Is It Driven by Inequality Within or Between Countries?
verfasst von: Thomas Goda
Alejandro Torres García
Publikationsdatum: 04.01.2016
Verlag: Springer Netherlands
Erschienen in: Social Indicators Research / Ausgabe 3/2017
Print ISSN: 0303-8300
Elektronische ISSN: 1573-0921
DOI: https://doi.org/10.1007/s11205-015-1222-0

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