The Globalization of Inequality available in Hardcover
The Globalization of Inequality
- ISBN-10:
- 069116052X
- ISBN-13:
- 9780691160528
- Pub. Date:
- 04/20/2015
- Publisher:
- Princeton University Press
- ISBN-10:
- 069116052X
- ISBN-13:
- 9780691160528
- Pub. Date:
- 04/20/2015
- Publisher:
- Princeton University Press
The Globalization of Inequality
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Overview
In The Globalization of Inequality, distinguished economist and policymaker François Bourguignon examines the complex and paradoxical links between a vibrant world economy that has raised the living standard of over half a billion people in emerging nations such as China, India, and Brazil, and the exponentially increasing inequality within countries. Exploring globalization's role in the evolution of inequality, Bourguignon takes an original and truly international approach to the decrease in inequality between nations, the increase in inequality within nations, and the policies that might moderate inequality’s negative effects.
Demonstrating that in a globalized world it becomes harder to separate out the factors leading to domestic or international inequality, Bourguignon examines each trend through a variety of sources, and looks at how these inequalities sometimes balance each other out or reinforce one another. Factoring in the most recent economic crisis, Bourguignon investigates why inequality in some countries has dropped back to levels that have not existed for several decades, and he asks if these should be considered in the context of globalization or if they are in fact specific to individual nations. Ultimately, Bourguignon argues that it will be up to countries in the developed and developing world to implement better policies, even though globalization limits the scope for some potential redistributive instruments.
An informed and original contribution to the current debates about inequality, this book will be essential reading for anyone who is interested in the future of the world economy.
Product Details
| ISBN-13: | 9780691160528 |
|---|---|
| Publisher: | Princeton University Press |
| Publication date: | 04/20/2015 |
| Pages: | 224 |
| Product dimensions: | 5.70(w) x 8.60(h) x 1.00(d) |
About the Author
Read an Excerpt
The Globalization of Inequality
By François Bourguignon, Thomas Scott-Railton
PRINCETON UNIVERSITY PRESS
Copyright © 2015 Princeton University PressAll rights reserved.
ISBN: 978-0-691-16052-8
CHAPTER 1
Global Inequality
Global inequality is defined as the level of inequality between all inhabitants of the world, thus combining rich and poor people in Latin America as well as in Europe or in the United States. Although this topic has not received much attention, it presents a rather complex combination of inequality between nations and inequality within nations. This has two major implications. First, global inequality is considerably higher than the inequality we see on average at the national level, given that it combines inequalities among citizens of the same country with disparities in average income between countries. Second, the way that global inequality has evolved over time is in fact the conjunction of two different trends, that of inequality within countries between poor and rich in, for example, France or in Nigeria; and that of inequality between countries, that is to say, between the average person in France and the average person in Nigeria. These trends can sometimes balance each other out and sometimes reinforce each other. Following a brief description of the methods that are used to estimate global inequality, this chapter will examine both its levels and its evolution.
Measuring Global Inequality
The first question that comes up when talking about inequality is: inequality of what? There is inequality of individual earnings, family income, wealth, consumer spending, or individual economic well-being. At the global level, I will be interested in inequalities of "standard of living" between citizens of this planet, defined as household income per member as reported in surveys conducted in most countries using representative samples of households. The numbers that I cite in this chapter and in the tables that follow refer to a constant sample of 106 countries (34 developed countries and 72 developing countries) for which at least two surveys are available over the 1990–2010 period, which allows us to take into account the evolution of inequality within these countries and its contribution to changes in global inequality. On average, these 106 countries, which I list at the end of the chapter, represent a little more than 90% of the world's population.
There are several databases that compile the data obtained from these household surveys. For developing countries, I will use the "Povcal" database, which is run by the World Bank, and for developed countries I will use the "OECD Database on Household Income Distribution and Poverty."
In order to make comparisons using this national data, it will need to be adjusted in several ways. The first adjustment comes from the fact that we want to express the standards of living observed at the national level through a metric of equivalent purchasing power. Converting incomes earned in pesos, rupees, or CFA francs into dollars (or euros) according to the official exchange rates is easy. However, since the prices, in dollars, for the same goods differ from one country to another, the numbers this would give us would not be truly comparable in terms of purchasing power; $100 does not buy the same volume of goods in New York that it does in Delhi when converted into rupees. We therefore need to adjust official exchange rates so that the conversion into dollars takes into account differences in the price of the same bundle of goods in various countries. International price comparisons make it possible to fine-tune indicators of "purchasing power parity," which in turn enable us to express standard of living in different countries in dollars and the purchasing power of a dollar in the United States in a given year. This adjustment is smaller for developed countries than for developing countries because prices are relatively similar and not too far from prices in the United States in the former. It may be sizable for developing countries, especially the poorest ones. It is not uncommon to need to multiply the numbers obtained using the official exchange rates by 2.5 or more. Absent any further specification, the numbers I will use for standards of living in this chapter will be expressed in the purchasing power of U.S. dollars from 2005.
Another source of incomparability is the way household size is taken into account when estimating the standard of living of an individual. The Povcal data define the standard of living of a person by simply dividing the income (or the consumer spending) of the household to which they belong by the number of household members. The OECD data, on the other hand, refer to income per equivalent adult, each member of the household being given a weight that depends on age and the number of household members. Adjustment is therefore necessary for these two databases to become comparable.
Another, more serious source of heterogeneity within the national data on standards of living we are concerned with is the definition of household "income." In some countries, surveys collect data exclusively on income, in others, on consumer spending. Agricultural income and independent workers' earnings are estimated with varying degrees of imprecision. Income in some surveys includes virtual income, such as the rent implicit in owning one's own house, which is the amount a household could expect to pay if it were to rent its current house at market rates, while others leave these out. Some ignore the role played by taxes and transfers of income that households pay or receive. And so on. Finally, from the perspective of international comparability, the income or consumer spending of households does not take into account the availability of goods and services that are offered for free by the state and that, to varying degrees depending on the country in question, impact the livelihood of the population.
There are two schools of thought as to how we should address the heterogeneity of our sources across countries. The first recommends that we keep the numbers as is—after having converted them into international purchasing power—thus ignoring the preceding sources of heterogeneity. The second says that we should apply a factor of proportionality to the individual datasets such that the average standard of living is consistent with national accounts, deemed to be more homogeneous than household surveys. Thus, some authors normalize household survey data so that the mean standard of living in a country will be equal to per capita household consumption in the national accounts of that country. In what follows, I will be reporting on household survey means as well as on household survey figures normalized by GDP per capita rather than national accounts' private consumption expenditures per capita. GDP includes the public goods delivered by the state and implicitly consumed for free by households—but also some monetary flows that don't accrue to them—like undistributed firms' profits. It is also the case that, in developing countries, GDP data are more frequently available than aggregate household spending in national accounts.
This choice is not without its critics. On the one hand, it is clear that normalizing the data from household surveys to per capita GDP in order to measure standards of living is not neutral from the point of view of distribution. The income missing from the surveys, the taxes, and transfers in cash or in kind that are omitted, the consumption of public goods, and so forth, are certainly not proportional to reported income in the surveys. What's more, we know that per capita GDP is a very imperfect indicator of the economic well-being of a nation's citizens. The Sen-Stiglitz-Fitoussi report on the need to go "beyond GDP" to measure social welfare was enough to convince anyone who might have remained undecided. Unfortunately, we are still some way from having the statistics we would need to improve our comparative measures of individual standards of living for a representative sample of countries and over the long term. For a while longer, international comparisons, such as those that attempt to evaluate global inequality, will have to employ this crude approximation of well-being. Conversely, we must also recognize that, given the heterogeneity mentioned above, we should be cautious about estimating the average well-being of a national population using data on income or consumption taken from household surveys. The lively debate sparked in India by the divergence between the growth rate of household consumption expenditure per capita as given by the national accounts and by household surveys in the 1990s is proof that there can be a potentially significant divergence between the two approaches. This divergence is even more problematic when it comes to establishing the comparative framework necessary for estimating global inequality.
But this particular methodological divergence is not necessarily a problem when it comes to tracking the evolution of global inequality over time. We can imagine that the ratio between the estimates obtained using these two methods should not change drastically, or only slowly over a long period of time. Yet, while this appears to be the case in recent history, prudence requires that we examine the numbers obtained through both approaches. Although in this chapter I will give priority to normalizing to capita GDP, the appendix to this chapter shows detailed results obtained with and without this normalization, and shows that indeed the direction of change in global inequality is the same with both approaches.
Another methodological issue concerns which statistical unit to consider. At the national level, it is natural that the unit be the individual, adult or child, active or inactive. Each individual in the population is assigned the income (or the consumption expenditure) of the household to which he or she belongs, divided by the number of its members. Expanding this to the global level consists in simply juxtaposing national populations and looking at the distribution of individual standards of living over a population of 6 or 7 billion people. The high end of this distribution includes wealthy Americans, Europeans, and Saudis, but also includes wealthy Indians and South Africans. Similarly, the low end of the distribution includes a lot of Africans and South Asians, but also the Chinese, Bolivian, Filipino, and Thai poor.
In order to understand the evolution of global inequality over time, it can be useful to isolate the relative roles of inequality between countries and inequality within countries. However, measuring inequality between countries requires that we switch statistical units, shifting over to the country, rather than its nationals, as our unit and assigning it the average standard of living of its inhabitants. This is the definition of global inequality implicitly referenced by the abundant macroeconomic literature of the 1990s on the subject of economic growth and more specifically on the question of whether forces existed that would lead to the "convergence" of per capita national income between countries. In this case, we have to address the question of whether or not we should weight countries by population. Depending on which answer we choose, inequality levels can vary greatly. There is a very high level of inequality between the standards of living of the Chinese and the Luxembourgers. But a fictional population that consisted of 1.3 billion Chinese people and half a million Luxembourgers, with each person assigned the average standard of living of his or her country of origin, would actually be quite equal, given that the rich Luxembourgers would represent only a negligible fraction of the total population.
This question of statistical units to consider leads us to examine different definitions of global standards of living inequality. I will primarily use two definitions: inequality "between countries" (or "international" inequality), which describes the inequality that we would observe in the world if all the nationals of a country had the mean income of that country; and "global" inequality, which, in addition, takes into account intranational disparities in standards of living. An alternative to the between countries inequality is obtained when considering income disparities between representative nationals, in other words giving the same weight to all countries, rather than weighting them by their population (as in the example of China and Luxembourg). When using identical country weights, I use the term "international income scale" and refer to the inequalities on this scale.
The following example illustrates these various concepts. There are two countries A and B with mean income YA in the first country and YB in country B. There are four people, two rich and two poor, in country A, and only two, one rich and one poor, in country B. Finally, poor and rich people have an income YAp and YAr in country A, and YBp and YBr in country B, respectively. With these notations, the three types of distribution just described are as follows:
(YAp, YAp,YAr, YAr, YBp, YBr): global distribution and global inequality
(YA, YA, YA, YA, YB, YB): international distribution and between country inequality
(YA, YB): international income scale
A third question about definitions concerns the measurement of inequality. There are many ways to describe the statistical distribution of a quantitative variable within a population, whether it be height, weight, or standard of living. We might choose to focus only on the extremes of the distribution: the portion of total income that goes to the wealthiest or poorest 5%, 10%, or 20%, for example, or even the average income of the wealthiest X% in comparison to that of the poorest Y%. But we can also try to take into account the differences observed at intermediate levels. Various synthetic methods of measuring inequality do this in different ways.
In this book, I will use basically four measures of inequality: the share that goes to the richest (1%, 5%, or 10%), the relative gap between standards of living in the extreme deciles (the richest 10% and the poorest 10%), the Gini coefficient, and the Theil coefficient. The Gini coefficient is probably the most frequently employed measure of inequality. It takes into account the entirety of the distribution rather than just the extremes and can be defined as (half) the average absolute difference between two individuals chosen at random in the population, in relation to the average standard of living of the population as a whole. For example, in a society where the average standard of living is $40,000, a Gini coefficient of 0.4 would mean that the average gap between two individuals chosen at random in the population would be $32,000. The Theil coefficient also takes into account the full range of the distribution. For any decomposition of the population into distinct groups, it has the property that it can be broken down into the sum of inequality between groups and the inequality within groups, which is clearly an advantage in the present case. In the previous example, the Theil coefficient corresponding to the global distribution can be decomposed into the Theil coefficient corresponding to the between country distribution (YA, YA, YA, YA, YB, YB) and the average of the Theil coefficient of inequality within the countries A and B, which depends only on the differences YAr-YAp and YBr-YBp.
A final question about definitions must be addressed: the difference between inequality and poverty. One could criticize the measurements just given for being relative. That the poorest 10% have a standard of living ten times lower than the richest 10% does not mean the same thing in India that it does in Luxembourg. In India, it means that the poorest 10% have difficulty surviving or are one economic incident away from starvation, which is not the case in Luxembourg. It is therefore important to introduce an absolute norm into the evaluation of global inequality. An easy way of doing this is to define an absolute threshold of poverty and count the number of persons who fall below it. The most commonly used threshold is "1.25 dollars per person per day" in 2005 international purchasing power. This number corresponds to the official poverty threshold that is used by the poorest countries in the world that have established such a threshold. It is often called "extreme poverty." A higher, less exclusive, threshold of 2.50 dollars per person per day is also widely used.
Global Inequality at the End of the 2000s
No matter how you measure it, global inequality is considerable, probably above the level of what a national community could bear without risking a major crisis. It is in any event considerably higher than the levels of inequality generally observed at the national level, as we can see by using a few countries as examples.
(Continues...)
Excerpted from The Globalization of Inequality by François Bourguignon, Thomas Scott-Railton. Copyright © 2015 Princeton University Press. Excerpted by permission of PRINCETON UNIVERSITY PRESS.
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Table of Contents
Foreword to the English Edition vii
Introduction: Globalization and Inequality 1
Chapter 1 Global Inequality 9
Appendix to Chapter 1 Detailed Evidence on the Recent Changes in Global Inequality 41
Chapter 2 Are Countries Becoming More Unequal? 47
Chapter 3 Globalization and the Forces behind the Rise in Inequality 74
Chapter 4 Toward a Fair Globalization: Prospects and Principles 117
Chapter 5 Which Policies for a Fairer Globalization? 146
Conclusion Globalizing Equality? 184
Index 191
What People are Saying About This
"François Bourguignon's book stands out for its ability to combine global sweep with attention to minutiae, its passionate concern for the world's burgeoning inequality, and dispassionate analysis of the causes behind these growing disparities. An amazing amount can be learned from this slim volume on inequality within and across nations."—Kaushik Basu, chief economist and senior vice president of the World Bank"François Bourguignon once again demonstrates his position as one of the world's leading thinkers on inequality. In this book, he stresses that careful attention must be paid to the distinction between global and national inequality. Bourguignon sets forth policies for achieving both convergence of global standards of living and economic efficiency, and he warns that inequality profoundly threatens social stability. May the hopeful part of his message prevail."—Gary Fields, author of Working Hard, Working Poor: A Global Journey"In this tour de force, François Bourguignon shows how the seemingly paradoxical phenomena of rising inequality within countries and falling inequality between countries are related to each other, and caused by globalization. Written in a style accessible to a general audience, this excellent work by a global leader in inequality analysis will have lasting value."—Ravi Kanbur, Cornell University"This book deals with extremely topical issues related to inequality. Bourguignon is exceptionally well-qualified to provide an overview of recent trends, tease out the implications of the global-versus-national perspective on inequality, and seriously examine the factors at work as well as promising policy responses."—Brian Nolan, University of Oxford"An excellent treatment of a very important subject from a leading researcher in the field."—Stephan Klasen, University of Göttingen"This work makes a significant contribution to the general understanding of globalization's influence on inequality. While much is being said on the topic, this book is a rarity in being both accessible and informed."—Jean-Yves Duclos, Laval University