What an impressive work of economic history tells you about inequality

from The Economist

ANGUS MADDISON, who died in 2010, was among the most influential of economic historians; his book on the world economy over the past 2,000 years is a classic. Now, one of the institutions he worked for, the Organisation for Economic Co-operation and Development, has teamed up with the University of Utrecht to produce an account of the conditions of life in 25 countries since 1820. It details everything from builders’ wages in 1920s Japan to homicide rates in 19th-century Italy. It bridges the gap between Maddison’s macroeconomic panorama and microeconomic studies by historians such as Peter Laslett, author of “The World We Have Lost”, about early modern England.

For the most part, the findings confirm what is suspected, if not known in such detail. The number of years in education has increased everywhere. Average heights have risen almost everywhere (by 1.1cm more in America in 1820-1990 than in China). The purchasing power of construction workers’ wages has grown everywhere, though in Britain the rise was tenfold in 1820-2000; in Indonesia it was only twice.

There is an exception to this generalisation, though: inequality. You would expect that the world of the Qing dynasty, Tsar Nicholas I and the British East India Company would be more unequal than today’s. Yet in China, Thailand, Germany and Egypt, income inequality was about the same in 2000 as it had been in 1820. Brazil and Mexico are even more unequal than they were at the time of Simón Bolívar. Only in a few rich nations—such as France and Japan—do you find the expected long-term decline in income inequality.

What is true for individual countries is also true if you treat the world as a single nation. The study uses the Gini coefficient, a measure of income inequality in which zero represents perfect equality—everyone has the same income—and 100 perfect inequality—one person has everything. The global Gini rose from 49 in 1820 to 66 in 2000. But this was not caused by widening disparities between rich and poor within countries (inequality in its usual sense). Inequality of that sort fluctuated for 130 years to 1950, before falling sharply in 1950-1980, in what the report calls an egalitarian revolution. Since 1980 it has risen again (as Thomas Piketty, a French economist, has shown), back to the level of 1820.

That implies the two-century rise in global inequality must come from elsewhere: from what is called “between-country inequality”, the gap between rich and poor nations. This gap has widened sharply. In 1820 the world’s richest country—Britain—was about five times richer than the average poor nation. Now America is about 25 times wealthier than the average poor country. The Gini coefficient for between-country inequality stood at only 16 in 1820 (ie, very low). It soared to 55 in 1950, and has been stable since. The driving force of inequality since 1820, in other words, has been industrialisation in the West.

This has made the global distribution of income look peculiar. A normal income distribution has a bell shape: the largest number of people are in the middle with tails of rich and poor to either side. The chart shows that in 2000 global income distribution formed such a bell, as it did in 1820. But in 1970, the line is different: a Bactrian camel not a dromedary. This reflects Western nations breaking away from the majority of the world and becoming richer (ie, moving right on the chart), thus creating a second hump.

The report says this development coincides with a retreat from globalisation in 1914-70. As globalisation ebbed, it argues, rich countries had more freedom to steer domestic policies and used it to narrow differences between rich and poor. As globalisation spread again after 1980, the opposite happened: “globalisation contributed to higher income inequality within countries,” the report concludes, “while at the same time leading to a decline of income inequality between countries.”

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