“Every study on inequality, of course, challenges the structures not only of the economy but also of the world we live in, and these questions are not always welcome. […] the main idea is that we have a perfect system and it should not be questioned.”
The world has experienced a deep change in the last 25 years, facing its greatest shuffle in global inequality since the Industrial Revolution. With the outbreak of the Financial Crisis, inequality has assumed a central role, both in politics and in the academia. In this article, I would like to get a hint on this topic, and then a brief highlight on its relationship with western countries politics, which are characterized by high levels of instability and uncertainty.
It’s worth to say that there is not a unique measure of inequality, but it might have different shades depending on which measurement and data are used. Traditionally, the main measures focus on per capita income. However, another measure that is used is labelled “inequality of equivalized disposable income”. The equivalized disposable income is defined as the total income of a household, after tax and other deductions, that is available for spending or saving, divided by the number of household members converted into equalised adults. It involves the use of an equivalence scale, provided by the OECD.
Graph 1. Source: XXVIII Conferenza SIEP 2016, François Bourguignon.
Graph 2. Source: XXVIII Conferenza SIEP 2016, François Bourguignon.
Graph 3. Source: XXVIII Conferenza SIEP 2016, François Bourguignon.
Graph 4. Source: XXVIII Conferenza SIEP 2016, François Bourguignon.
The previous graphs show the different paths of equivalized disposable income within countries. In developed western countries the trend is mainly positive and increasing. This observation gives rise to a second, crucial issue. While inequality within developed countries increased, inequality between countries globally decreased. Consider the following graph.
Graph 5: Global Growth Incidence Curve 1988–2008 (2011 PPP). Source “Christoph Lakner and Branko Milanovic”.
The previous graph represents “The Growth Incidence Curve” (GIC), which refers to the annualized growth rate of per capita income for every percentile of income distribution between two points in time. On the y-axis is shown the “Cumulative Global growth rate” from 1988 to 2008, in percentage terms. The horizontal line represents the average. The x-axis represents the “Percentiles of the global income distribution”, in Purchasing Power Party (PPP) of 2011. It became famous as the “Elephant Chart” due to its shape, and it was produced by Christoph Lakner and Branko Milanovic, the latter being a Serbian-American economist at the time working for the World Bank. From the graph, it’s possible to retrieve three key implications:
- the growth of the per capita income of the global lower and middle classes, the latter especially representing China’s middle class, in the graph being the area around the maximum point of the distribution;
- zero growth for the middle class of the developed western countries, in the graph being the area close to the minimum point of the distribution;
- considerable gains for the richer part of the population, specifically the 1% and 5% of the population, living mainly in western developed countries.
The authors urge to recall that the gains were measured in relative percentage terms. Hence, incomes at the top are several orders of magnitude greater than incomes at the median, the absolute gains being much greater for higher percentiles.
In a sense hundreds of millions of poor people are now less poor, reducing the global level of poverty, while those who have lost the most were already relatively well-off. However, this would not be a satisfactory answer to neither western policy-makers, nor to its workers.
IMPLICATIONS: THE LINK WITH POLITICS
From the “Elephant Chart” it is possible to see how the income per capita of the western developed countries basically stagnated. In addition, inequality within countries had an overall positive trend. This combination might have affected political agenda, via also the concept of “perceived inequality”.
Looking at the US, it’s easy to link this increase with the pre-electoral agenda of President Trump, characterized by antagonisms such as “We Americans” against “Mexican immigrants” or “our jobs” against “cheap imports from China”. However, as a President, Trump has addressed a mercantilist approach that wants to increase the gains from globalization for the US, globalization being a main driver of this inequality shuffle, according to literature on both topics*. Thus, a de-regulatory agenda has been developed for the highly globalized US financial sector and tax reductions for the corporate sector in general, to improve its international competitive position.
As far as the EU is concerned, the wind of populism is still blowing, with the upcoming French election and some consolidated parties like in Poland and Hungary, leaving uncertainty on the situation. A detailed analysis on the EU situation is provided in an article from this magazine.
In the period before the Financial Crisis, macroeconomics, and economics in general, placed the ‘”representative agent” as the centre of its theoretical framework, ruling out any form of heterogeneity. Inequality is by definition heterogeneous. After the Financial Crisis, and the subsequent collapse of the “representative agent” theoretical framework, many left behind topics were shed new light on. Inequality is among one of them, especially after the release of “Capital in the XXI Century”, by Thomas Piketty and more recently after the publication of the previously cited paper “Global Income Distribution: From the Fall of the Berlin Wall to the Great Recession” by Christoph Lakner and Branko Milanovic. In an ever growing heterogeneous world, it’s good to have an heterogeneous view.
* Ebenstein, Harrison, McMillan and Phillips (2014), Ebenstein, Harrison, McMillan (2015), Feenstra and Hanson (1999).