The Direction of Global Inequality

Which way is global inequality going? 

This should be a question with a simple answer. First, the question must be clarified. Usually answers to this question refer to the Gini coefficient, where a number close to 1 implies all of the wealth is owned by a few and a number close to 0 indicates that income is distributed more evenly.  If the question is asking about the direction of income inequality in various countries around the world, the answer is obvious: It is going up.

The above chart from a 2011 OECD report on income inequality highlights that income inequality has been rising in most countries around the world. It may be that national inequality is more important than global inequality, as electoral (or revolutionary) politics have a history of working more on a national basis than a global basis.

Still, the direction of global income inequality is still interesting for its own sake. A World Bank working paper, Global Income Inequality by the Numbers: In History and Now by Branko Milanovic looks at three different ways of measuring global inequality.

Concept 1. Inequality between countries.

Concept 2. Inequality between countries weighted by population.

Concept 3. Inequality between individuals of the world.

The first two are easy to measure while the third metric is much harder to get data for until the 1980's. Concept 2 is clearly superior to concept 1, as smaller countries should not be weighted the same as significantly larger countries. By the same measure, concept 3 is superior to concept 2, as wealth in developing countries is less significant if it is wholly in the hands of a few. The only downside to concept 3 is the inherent data problems as surveys of the very poor and the very rich will often be skewed.

Looking at concept 2 and concept 3, it appears that worldwide inequality has actually been falling during the 2000's. It may be a little unintuitive that inequality can go up everywhere but down in total. But those in the bottom third of the income distribution have seen their real incomes rise between 40% and 70% over the past 20 years. This has created a new middle class and the income distribution has become somewhat more equal overall even if countries where people are coming out of poverty are also creating many new US dollar billionaires.

Whether or not this trend will hold is another question entirely. The internet gave a boost to the economic institutions of almost every country in the world, so from the mid 2000's up until the financial crisis we had unconditional convergence between developing and developed countries. Going forward, institutional quality might again begin to cap the growth of developed countries around the world. And if that happens, world inequality may start to increase yet again.