The Disturbing "Rise" of Global Income Inequality

The $1/day poverty rate has fallen from 20 percent of the world's population to 5 percent over the last 25 years and the $2/day poverty rate has fallen from 44 percent of the world's population to 18 percent.

It is widely assumed that the rate of income inequality and poverty in the world is increasing dramatically, in large part because of globalization. For example, the 1999 issue of the United Nation's Human Development Report states that the income of the richest 20 percent of the world's population was 30 times that of the poorest 20 percent in 1960 and 74 times that of the poorest group in 1977.

Writing in The Disturbing "Rise" of Global Income Inequality (NBER Working Paper No. 8904), however, economist Xavier Sala-i-Martin finds no evidence of a dramatic or disturbing rise in income inequality during the globalization period. On the contrary, he finds that income disparities during the last two decades have declined substantially. The world as a whole is becoming richer and the large group of people close to the poverty line has been shrinking since 1970, giving rise to a large middle class. The $1/day poverty rate has fallen from 20 percent of the world's population to 5 percent over the last 25 years and the $2/day poverty rate has fallen from 44 percent of the world's population to 18 percent. There were between 300 and 500 million fewer poor people in 1998 than there were in the 1970s.

The author uses aggregate GDP data and within-country income shares to assign a level of income to each person and to determine within-country and across-country income disparities (differences). Within-country income disparities have increased slightly since 1970, but not nearly enough to offset the substantial reduction in across-country disparities. Sala-i-Martin finds that across-country reductions in income inequality can largely, but not entirely, be explained by the significant growth rate in incomes of China's citizens. With 1.2 billion people, collectively accounting for one-sixth of the world's population, their increased incomes raise the world's income bringing it closer to the levels of the rich, and thus narrowing across-country income disparities.

Sala-i-Martin predicts that if Africa remains economically stagnant and all other countries, including China and India, keep growing at rates similar to the ones they experienced during the last two decades, then world income inequalities will resume their long-term upward trend some time during the next 20 years.

-- Les Picker