At least 80% of global income differences pre-determined - Part 2

At least 80% of global income differences between individuals in rich and other countries are pre-determined according to Branko Milanovic, a former World Bank economist, who is a development specialist with a focus on inequality.

In his 2011 book 'The Haves and the Have-Nots: A Brief and Idiosyncratic History of Global Inequality,' Milanovic said that 60% of an individual's income is determined by the country of birth and then 20 additional percent by how rich are the person's parents. Then factors such as gender, race, ethnicity, put the ratio above 80%.

For example, the typical person in the top 5% of the Indian population, makes the same as or less than the typical person in the bottom 5% of the US population.

Milanovic wrote:

One’s income thus crucially depends on citizenship, which in turn means (in a world of rather low international migration) place of birth. All people born in rich countries thus receive a location premium or a location rent; all those born in poor countries get a location penalty.

It is easy to see that in such a world, most of one’s lifetime income will be determined at birth.

Citing a World Bank survey Milanovic also wrote:

countries that have done economically poorly would, if free migration were allowed, remain perhaps without half or more of their populations.

In 2014, the Organisation for Economic Cooperation and Development (OECD) published a book, 'How Was Life? Global Well-being since 1820,' which says:

The world’s average GDP per capita increased by a factor of 10 between 1820 and 2010; as total population increased seven-fold, total real GDP went up by a factor of 70. Yet this growth was spread very unevenly, resulting in a considerable increase in income disparities between countries. In 1820, the richest countries were about five times as wealthy as the poorest countries, while they were more than thirty times as well-off in 1950. This was driven by a process of rapid industrialisation. Only recently, as a result of the rapid growth experienced by China and India, has global income inequality begun to decline.

Since 1820, the world has witnessed a spectacular growth of economic well-being and production capacity. On a global scale, GDP per capita has risen 10-fold since 1820. The average level of world GDP per capita increased from $650 in the 1820s to $1,291 in the 1900s, and from $2,405 in the 1950s to almost $7,000 in the 2000s (these are 1990 international dollars adjusted for price differences).

The richest country in 1820 in Western Europe was the United Kingdom, at around $2,100 per capita, while the poorest country was Finland with an average of $ 781 per capita. North America (e.g. the United States, at around $1,300) and the southern cone of Latin America (e.g. Argentina, with $998, and Uruguay, at $1,165) came very close to the Western European average (or even surpassed it, as in the case of the United States). GDP per capita for Latin America was much lower, with an average value of $620. Other countries in the southern hemisphere had comparable low levels of GDP per capita: the average GDP per capita for the Cape Colony in 1820 was about $800, while it was even lower in Australia, at around $518. The most populous countries of the world — China, India, Indonesia — had GDP per capita ranging between $530 and $600 in 1820, about half the Western European level. Japan recorded a somewhat higher per capita GDP ($660), as did the Ottoman Empire ($740). Global inequality in GDP per capita was still modest: the wealthiest developed country (UK) was “only” about four times as rich as the poorest one in 1820 (Australia, at $518).

Life expectancy at birth was about 33 years in Western Europe around 1830, 40 years in 1880, and almost doubled in the period after, with the largest improvements occurring in first half of the 20th century. In the rest of the world, life expectancies started to increase from much lower levels, rising in particular after 1945. Worldwide life expectancy increased from less than 30 years in 1880 to almost 70 in 2000.

Long-term trends in income inequality, as measured by the distribution of pre-tax household income across individuals, followed a U-shape in most Western European countries and Western Offshoots  (the United States, Canada, Australia). It declined between the end of the 19th century until about 1970, followed by a rise. In Eastern Europe, communism resulted in strong declines in income inequality, followed by a sharp increase after its disintegration in the 1980s. In other parts of the world (China in particular) income inequality has been on the rise recently. The global income distribution, across all citizens of the world, was uni-modal in the 19th century, but became increasingly bi-modal between 1910 and 1970 and suddenly reverted to a uni-modal distribution between 1980 and 2000.

Historical data is based on estimates that were produced by Angus Maddison, the late British economic historian, and 1990 international dollars adjusted for price differences are used.

France in 1820 was Europe's most populous country with a population of 30.5m compared with the UK's (including Ireland) 21m.

The OECD report says that the ratio between the United Kingdom, the “productivity leader” in 1820 and the poorest parts of the world was at most 5 to 1.

However, the 19th century was a period of divergence, during which the rich became richer – Western Europe and its Offshoots — benefited from the technological changes unleashed by the Industrial Revolution, while other parts of the world economy (China, India, Indonesia known as the Dutch East Indies) saw their GDP per capita fall or stagnate at best, due in part to de-industrialisation and colonial exploitation.

In the first half of the 20th century, it was mainly the United States benefiting from significant invention and innovation moved ahead of Western Europe. The Atlantic income gap that emerged as a result declined during the post-war boom in Europe between 1950 and 1973. Then other parts of the world also began to participate in the process of modern growth, sometimes helped by decolonisation.

In particular East Asia fared well after the 1960s, and became the most dynamic centre of the world economy after 1980 when China also joined the convergence club. But the OECD said economic growth in Africa has been much more incidental, and this continent has continued to lag behind the rest of the world economy.

In the past 500 years, the Dutch were the richest people in the world from the early 1600s to about 1780 (population 1.9m in 1700), when they were overtaken by the British (including the poor Irish!) and the US took the crown in the closing decades of the nineteenth century.

More on inequality within countries in Part 3

How Was Life? presents the first systematic evidence on long-term trends in global well-being since 1820 for 25 major countries and 8 regions in the world covering more than 80% of the world’s population. It not only shows the data but also discusses the underlying sources and their limitations, pays attention to country averages and inequality, and pinpoints avenues for further research.

Global inequality in first fall since Industrial Revolution- Part 1

Charts: Source OECD