The Reality Of Global Inequality

The differences in income among citizens of the world are absolutely huge and far higher than conventional measures indicate, according to new research by Branko Milanovic, published in the latest issue of the Economic Journal. His calculations of global inequality show, for example, that the richest 1% of people in the world receive as much as the bottom 57%; in other words, less than 50 million richest people receive as much as 2.7 billion poor.

In addition to being very high, global inequality is rising. For example, in a mere five-year period between 1988 and 1993, inequality increased by 5% with the real incomes of the poorest 5% of people in the world decreasing while the real incomes of the top 20% increased. World inequality rose at approximately the same speed at which UK inequality rose during the Thatcher years. And as the rich get richer and the poor poorer, the middle of the income distribution is disappearing.

Why is the picture so much bleaker than conventional measures indicate?
What is new about Milanovic''s work is that, for the first time ever, inequality among people in the world is calculated as if they all belonged to the same ''nation'' called the world. Household surveys, which are the source of information on incomes and inequality within each country, have been combined to derive the ''true'' world income distribution. Such surveys were taken for 91 countries in the world, covering 85% of the world''s population and 95% of world income.

Previous studies have calculated world inequality as the difference between average incomes (GDP per capita) of the countries, disregarding inequality in distribution within each country. Implicitly, such studies assume that each Chinese person had the average income of China, each American the average income of the US. But if we go ''deeper'' and use the actual survey results, the picture changes and becomes bleaker.

Milanovic estimates inequality among citizens of the world at 66 Gini points, on a scale that runs from 0 (total equality) to 100 (one person gets all world income). The level of 66 is higher than inequality in any single country: the world is a more unequal place than South Africa or Brazil. This level of inequality is equivalent to a situation where 66% of people have zero income, and 34% divide the entire income of the world among themselves equally.

Basically, the ''problem'' with the world is that it lacks a middle class. If we define the poor as those with real income lower than the poverty line that makes people eligible for social assistance in Western Europe and the US, 78% of world citizens would qualify. (Note that this includes adjustment for lower price levels in poorer countries, so that it is a measure of real differences in purchasing power.) If we then define the world ''middle class'' as all those with incomes higher than the Western poverty lines but lower than the average income of Italy, there would be only 11% of such people in the world. The rest would be the rich.

What is driving the increase in global inequality?

  • First, widening differences between slow-growing rural incomes in several populous Asian countries (Bangladesh, India) as well as in most of Africa compared to the rich world.
  • Second, the downward slide in real incomes in Eastern Europe and the former USSR, which ''emptied out'' the world middle class – most people in these countries, before the transition, were around the middle of the world income distribution.
  • Third, the widening gap between urban (high) and rural (low) incomes in China. This last factor shows how strictly internal developments in large and/or rich countries like China, India and the US have significant international repercussions: when 400 million Chinese pull ahead of the other 800 million Chinese, the world is affected.

Is the increase in inequality caused by globalisation?
Milanovic's work does not directly address this issue: there is no analysis of causality. It could be that we are witnessing a blip due to the effects of transition in Eastern Europe, and widening income differences between the rich West and most of the ''rest'' due to the strong period of growth in the rich world during the 1990s. But the main point is that whatever the cause of the current increase and whatever the exact amount of that increase, one thing is certain: the differences between individuals are huge.

We can wonder how long such huge inequalities may persist in the face of ever closer contacts, not least through television and movies, where opulent life-styles of the rich influence expectations and often breed resentment among the poor. Should it be of concern to the rich? Perhaps, if we believe that wide income gaps lead to migration, and resentment breeds terrorism. For ultimately, the rich may have to live in gated communities while the poor roam the world outside those few enclaves.

''True World Income Distribution, 1988 and 1993: First Calculations Based on Household Surveys Alone'' by Branko Milanovic is published in the January 2002 issue of the Economic Journal. Milanovic is in the Development Research Group at the World Bank, 1818 H Street NW, Washington, DC 20433.