Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers..
There are lots of measures of inequality. If we are interested only in income distribution within the United States, it doesn’t matter much which one we look at: They all show rising inequality, as noted in my preceding blogpost. But when we look at inequality internationally, which measure we look at makes all the difference.
What if we are interested in purely global inequality, if we want to treat everybody as a citizen of the world rather than a citizen of their own country? As Xavier Sala-i-Martin pointed out some years ago (2002, 2006), estimates of the global income distribution show a reduction in inequality. This may seem paradoxical since income has become more unequal in most countries. But the ongoing reduction in global inequality is no mystery: China, India, and some other developing countries have raised their per capita incomes at historic speeds since the 1980s, raising many millions out of poverty. The narrowing of the gap between these large poor countries and the rich countries has reduced global income inequality, by more than anything going on within countries.
Which measure of inequality?
There is a basic philosophical question whether one wants to look at “spread” measures such as the difference between the upper decile and bottom decile or a more comprehensive measure of income distribution such as the Gini coefficient. They often give different answers internationally.
How should we judge China if growth lifts a majority of the poor out of poverty, but benefits the rich even more, while leaving a minority of the poor relatively untouched? The high-low spread increases while the Gini could go down. (China’s Gini in fact peaked at 0.533 in 2010 and then fell to 0.495 in 2014.)
And what if the poverty rate goes down a lot? That seems to me the most important single statistic, even though it is not, strictly speaking, a measure of inequality. Between 1981 and 2010 China lifted 680 million people out of poverty. That alone constituted about ¾ of the big global fall in extreme poverty during these years.
The global poverty rate was cut in half in two decades:
- 1990, 43% of the population of developing countries lived in extreme poverty (then defined as subsisting on $1 a day); the absolute number = 1.9 billion people.
- By 2010 it was 21% = 1.2 billion. (The poverty line was then $1.25, the average of the 15 poorest countries’ own poverty lines in 2005 prices, adjusted for differences in purchasing power.)
Is China’s Gain America’s Loss?
Lots of factors no doubt underlie the growth miracle of China and other developing countries, from rural-urban migration to high rates of saving and education. But globalization is high on the list. Views differ. Sorting out the causality is difficult. My own perspective is that one can use geography to isolate exogenous determinants of trade; such analysis suggests that trade has indeed been an important cause of the economic success of Asia and therefore of some convergence with the West.
From the viewpoint of an “American Firster” like the current occupant of the White House, the proposition that trade explains China’s success immediately suggests the proposition that this success has come at the expense of the US. This zero-sum approach to trade was of course a feature of the mercantilist theory that reigned three centuries ago, before Adam Smith and David Ricardo pointed out that trade normally would benefit both partners. Their classical theory of comparative advantage said that everyone would benefit from the opportunity to consume goods produced in whichever country had the ability to produce them relatively more cheaply.
My preceding column noted that the trade model relevant for addressing the distribution of income between unskilled workers and everyone else was the Heckscher-Ohlin-Stolper-Samuelson model. That model could explain the rising wage gap within rich countries, but is at a loss to explain why the wage gap has also risen within developing countries. Evidently something else explains the world-wide phenomenon of rising within-country inequality, something like skill-biased technological change.
This post written by Jeffrey Frankel.