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Global Inequality – What’s Going On?

26 September 2014

Roger Williamson

Huge interest in the WIDER Inequality Conference (5-6 September)

Inequality is big news. Whether you think Thomas Piketty’s book is primarily long-run economic history or a prediction of future trends for returns to capital and labour, it is still a surprise that a big, serious economics book is a best seller.

So perhaps it should be no surprise that the demand for places at the UNU-WIDER inequality conference should be high, attracting 350 participants (one of the biggest by WIDER standards), and that only 15 per cent of the papers offered to the conference could be accepted.

UNU-WIDER – a centre for inequality research

In a way this theme of economic research was coming home. The World Income Inequality Database (WIID) was first established at WIDER for a project in 1997-99 called ’Rising income inequality and poverty reduction: Are they compatible?’ by the then director Giovanni Andrea Cornia. WIID has recently been revised and continues to be openly available. However this is far from being UNU-WIDER’s only contribution to the inequality debate. Inequality has been a priority at UNU-WIDER since its founding, with high profile figures such as Amartya Sen contributing research on the topic. During a filmed interview, former director Anthony Shorrocks told me that the 2006 WIDER Working Paper reporting on global household wealth, the first serious study of its kind, generated such interest that it was top story on the BBC website and the demand for downloads led to the UNU-WIDER website crashing twice in a day. His recollection was that the paper was downloaded 140,000 times in a month. Shorrocks and co-author James Davies continue a highly productive association preparing the Global Wealth Report put out annually by Credit Suisse. Cornia, Shorrocks and Davies all presented at the Inequality conference, and some comments will be made below on their papers.

Insights from politicians – early attention to inequality is needed

The conference was framed by contributors with high-level political experience as it was opened by the Brazilian Minister of Strategic Affairs, Marcelo Côrtes Neri – and closed with a final panel including Tarja Halonen, the former President of Finland. They provided political insights into why inequality matters and strategies to address it.

Neri used a wide array of analytical tools to illustrate the recent economic and social transformation of Brazil. He outlined the impressive achievements of Bolsa Familia, the programme which reaches 25 per cent of the population with expenditure of 0.5 per cent of GDP, and makes a dramatic difference to the poorest 5 per cent in particular. From 2002-12 extreme poverty decreased by 69 per cent - with half of this decline explained by growth and half by reduction in inequality.

Neri creatively used a range of indicators including incidence of first purchase of major household durables (65 per cent of computer sales in the last three years were to first-time buyers), or items such as first purchase of a ticket for air travel (37 per cent of international travel in the last three years was done by first-time fliers), and data of subjective assessments of personal satisfaction to chart progress. He highlighted the paradox that far more people expected their lives to improve in the next five years than were optimistic about their country’s future. He also provided a demographic profile of those who had been involved in recent protests; young, better educated, connected to social media, demonstrating that the protesters were not primarily the poor and excluded as one might expect.

Brazil, as well as Latin America more generally (as a recent WIDER project shows), is a particularly illuminating example of what can be done. It is one of the BRICS (and South Africa was a major focus of this conference), an important emerging economy, and also a microcosm of the world – with its poorest on a par with India’s poor, and the rich with living standards comparable with the rich in the USA. Even with slower growth in recent years, social indicators are improving with continued progress on education and life expectancy as well as improvements in housing.

Halonen presented a bold, impressionistic sketch of Finland’s social history, emphasizing that the country’s attempt to tackle inequality, including gender inequality, began before the country was rich. Promoting literacy and education was crucial to this process of overcoming civil war and the second world war for Finland, as was the fostering of democratic and inclusive values that emphasized universal provision of safety nets and economic equality. The conference opened with a video of Nobel economics laureate Amartya Sen, who reinforced the message of not waiting for prosperity to start promoting equality, stressing that Kerala had not been rich when it prioritized access to education for girls and boys.

IMF contributions

Two interesting speakers from the IMF, Andrew Berg and Michael Keen gave rigorous presentations. Berg used recent research to challenge the received wisdom of the ‘Big Trade Off’ between equality and growth. On average, across country and through time, he and colleagues have not been able to observe the existence of this trade off.

Berg distinguished between market and net inequality (with the latter taking account of redistribution through taxes and cash transfers). Lower net inequality is ‘robustly correlated with faster and more durable growth’. His colleague Michael Keen provided a clear and thoughtful paper, showing, among other things, that subsidies (e.g. on food) were often an inefficient way of helping the poorest sectors of the population. Even though the poor spend a larger percentage of their income on food, most of the expenditure (in terms of cumulative total – ie total dollars) on food would be by those who are not among the poorest. So, most of the benefit of the subsidy would accrue to those who are not poor.

Evaluating databases

In a session sponsored by the Journal of Economic Inequality, there was important technical discussion on the evaluation of inequality databases. This was timely, given the update of UNU-WIDER’s World Income Inequality Database (WIID). The session gave a preview of some of the contributions to a special issue of The Journal of Economic Inequality (forthcoming).

The initial impulse for the special issue was the discovery that in four out of nine cases in which the IMF (using imputational data) ‘found’ that inequality had declined in sub-Saharan African countries, POVCAL’s Gini coefficients derived from micro data showed an increase (comparisons between the early 1990s and late 2000s).

Nora Lustig provided a specialist guide on the critical interrogation of the different databases. Nine databases are scrutinized; six based on micro data; two on secondary sources (All the Ginis – ATG, and the World Income Inequality Database – WIID) and the imputation-based Standardized World Income Inequality Database – SWIID.

Lustig outlined the four criteria for the assessment as: 

1. Accessibility and user-friendliness.
2. The quality of the documentation.
3. The reliability/accuracy of the reported indicators.
4. The transparency and replicability of the methodology.

Andrea Brandolini (Bank of Italy) reviewed the World Top Incomes Database; Francois Bourguignon (Paris School of Economics) reviewed the Latin American databases; and Stephen Jenkins (London School of Economics) reviewed WIID and SWIID stressing that the two have different approaches. He concluded with a clear expression of preference of WIID over SWIID provided certain data issues are addressed (see here for changes that followed the comments in the article). His analysis provides a detailed critique of the imputational method used by Frederick Solt in the development of SWIID. The session was concluded by Markus Jäntti (Stockholm University) who ‘reviewed the reviewers’.

Leading thinkers on inequality and wealth

Francois Bourguignon took the opportunity to present reflections emerging from the major work on the preparation of the new Volume 2 of the Handbook of Income Distribution. He acknowledged that much better underlying data is now available, but there is still work to be done. He also argued that specialists need to be much more rigorous in their use of economic theory to explain empirical data and in exploring the practical implications of theoretical models. The three examples which he gave were: the role of skill-biased technical progress (SBTC) in explaining the rise in earnings inequality; automation and the rise in the share of capital; and the disregard of the lag between changes happening and those changes being reflected in the data.

He noted the greater attention to distributional objectives by the MDGs, as well as institutions like the IMF and the World Economic Forum, and skepticism about the potential for policy reform in developed countries – in spite of pronouncements by President Barack Obama. In developing countries, however, economic analysis confirms that policies can make a difference – as evidenced by the recent decline in inequality in Latin America. There is a need for more creativity in policy in the developed countries and less reliance on imported policies in developing countries.

The methodology for analyzing wealth inequality developed by Anthony Shorrocks and James Davies provided a number of valuable insights:

1. Wealth differences between countries are greater than income differences.
2. Global wealth Gini for adults is 0.905, for income the Gini is 0.70.
3. The global share of wealth of the top 1% is 46%.
4. The global share of wealth of the top 10% is 86%.
5. The richest 2% of adults own more than half global wealth.

For detailed results the reader is referred to the Global Wealth Report. One of the most impressive slides, used by both Shorrocks and Davies shows most of the Chinese population firmly in the richer half of the world’s population.

Much more besides

It is hard to do justice in a short article to the wealth of material presented. Two entire sessions were devoted to the study of South Africa, and many case studies were presented in the poster session – often by younger researchers. 

The event website provides a huge repository of research material.

WIDERAngle newsletter
September 2014
ISSN 1238-9544

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