A long-term view on inequality
Today’s posting is published on international Blog Action Day, which this year is focusing on income inequality.
A time-traveller from 200 years ago would find our world almost unrecognisable. Our technologies and lifestyles would seem almost magical – motorcars, air travel, our obsession with smartphones. The visitor from the past would also notice enormous social shifts: Today, we live longer; most of us can read; many of us have a say in who governs us; and, in much of the world, women and men are treated pretty much equally.
Still, there’s one thing that mightn’t surprise our visitor too much: Even though poverty is not what it once was, humanity is still divided between haves and the have-nots.
But is the world today really more unequal than in 1820, a time when emperors still sat on the throne in China, when monarchs ruled much of Europe and when mass industrialisation was still in its infancy? If you’re hoping for a simple yes or no, prepare to be disappointed. As the OECD’s recently released How Was Life? report shows, the world today is both more unequal and about as unequal as it was back in 1820. It all depends on how you look at it.
People typically think of inequality in the context of where they live – a rich guy passes in his Lamborghini, reminding you that you’ll probably never be able to afford one yourself. Economists call this “within-country inequality,” and it actually hasn’t changed very much since 1820.
But, from a global perspective there are at least a couple of other ways to think about inequality. One is in terms of “between-country” inequality – in other words, the gap between rich and poor countries. The other is to treat the entire planet as a single country – in other words, to look at the gap between rich and poor people worldwide, regardless of where they live.
Over the course of the past couple of centuries, probably the most striking change in inequality has been the emergence of rich and poor nations. As Angus Maddison discussed in The World Economy: A Millennial Perspective, back in 1820 countries in North America, Western Europe and Australasia, as well as Japan, had only about double the income of the rest of the world.
But then, in the 19th century, the world experienced what’s sometimes called “the great divergence,” when Western Europe and North America, in particular, began dramatically to pull away. As The Economist noted recently, in 1820, Britain was only about five times richer than the world’s poorest nation; today, the United States is about 25 times richer than the world’s poorest nation.
This divergence is sharply reflected in the How was Life? figures for between-country inequality. Back in 1820, the Gini figure for inequality between countries was just 16, which is extremely low. (Remember, 0 equals absolute equality on the Gini scale*, where everyone has the same income, and 100 equals absolute inequality, where one person bags all the income.) Today, by contrast, between-country inequality stands at 54.
What about if we treat the entire world as a single country? Here, it’s clear that inequality has risen, but more slowly than between countries: For 1820, it’s estimated that world inequality was 49 on the Gini scale; today it’s put at around 66.
What explains these trends? It’s hard to distil two centuries of history, but one factor looks to have played a significant and recurring role – globalisation. Throughout much of the 19th century, the world economy became increasingly globalised, but that process halted with the outbreak of the World War I and receded further with the split between the capitalist and communist zones before re-emerging in the 1980s.
There are reasons to think that the long period of de-globalisation in the 20th century was reflected in global income inequality, and, in particular, in an unusual pattern in global income distribution. Typically, we’d expect to see a “bell curve” – lots of people with incomes around the average and, at either end of the curve, some people with extremely low incomes and a few with extremely high incomes. But in the mid-20th century, we see the emergence of a curve with two “bumps”.
Source: How Was Life? (OECD, 2014)
It seems likely that these two bumps reflect the divisions of the post-World War II economy: On one side is the “rest of the world,” which included many communist states that actively pursued narrow income gaps; on the other is the “wealthy West,” which enjoyed increasing prosperity while also pursuing policies to narrow inequality.
Beginning in the 1980s, the bumps begin to fade. In a globalising economy, the wealth gap between countries began to narrow as places like China entered the global economy. By contrast, the wealth gap within countries began to rise. In part, that was a result of the collapse of the Soviet Union and the Eastern bloc. But it also reflects rising inequality in OECD countries. Since the 1980s, they, like many other countries, have faced tough choices over how to prosper in an increasingly global economy. In some cases, policies that have been good for competitiveness have not been all that great for equality.
* At the risk of upsetting statisticians, we’re using what the World Bank’s Branko Milanovic calls “Gini points” (a scale of 0 to 100), rather than the more traditional Gini coefficient scale of 0 to 1.
“Income inequality since 1820,” by Michail Moatsos, Joery Baten, Peter Foldvari, Bas van Leeuwen and Jan Luiten van Zanden (from How Was Life?, OECD 2014)
Mapping the history of wellbeing – Sue Kendall introduces How Was Life?
OECD work on inequality