Global inequality in first fall since Industrial Revolution- Part 1

Global inequality fell in the period 1988-2008 — the first decline since the First Industrial Revolution dating from about 1750 — this was a period that was bookended by the collapse of communism in the Soviet Union and its satellite states in eastern Europe, the re-emergence of China and the onset of the Great Recession. Despite growing inequality in developed countries, recent data to 2013 confirm the results.

Global inequality research was made possible when for the first time income distribution data for most of the significant countries in the world became available in the 1980s with the spread of globalisation, including China and ex- communist countries entering the global market.

Branko Milanovic, a former economist at the World Bank and author of the recently published book, 'Global Inequality: A New Approach for the Age of Globalization,' and Christoph Lakner of the World Bank, focus more on global inequality based on income while Thomas Piketty, the French economist and author of 'Capital in the Twenty-First Century' (2014), focused mainly on wealth.

Lakner and Milanovic (2013) presented results from detailed work on household survey data from about 120 countries over the period 1988–2008. Each country’s distribution is divided into 10 deciles (each decile consists of 10% of the national population) according to their per capita disposable income (or consumption) and adjustments are made for domestic inflation.

The researchers using the Figure 4 chart below, lined up all the individuals in the world, from the poorest to the richest (going from left to right on the horizontal axis in Figure 4), with the display on the vertical axis of the percentage increase in the real income of the equivalent group over the period 1988–2008:

We generate a global growth incidence curve — the first of its kind ever, because such data at the global level was not available before. The curve has an unusual supine S shape, indicating that the largest gains were realized by the groups around the global median (50th percentile) and among the global top 1%. But after the global median, the gains rapidly decrease, becoming almost negligible around the 85th–90th global percentiles and then shooting up for the global top 1%. As a result, growth in the income of the top ventile (top 5%) accounted for 44% of the increase in global income between 1988 and 2008.

Other research by Tomas Hellbrandt and Paolo Mauro of the Peterson Institute of International Economics, a Washington DC think-tank, shows in a 2015 working paper that global inequality is declining as poor countries grow. The global Gini coefficient — a standard measure of income inequality — is falling. In 2003 the coefficient was 69 (with 0 being perfect equality and 100 being perfect inequality). In 2013 it was down to 65. The researchers say that if current trends continue, it is on course to reach 61 by 2035. A long-term decline in the growth of emerging economies would slow the decline.

Lakner and Milanovic said that people around the median almost doubled their real incomes.

Not surprisingly, nine out of 10 such “winners” were from the resurgent Asia. For example, a person around the middle of the Chinese urban income distribution saw his or her 1988 real income multiplied by a factor of almost three; someone in the middle of the Indonesian or Thai income distribution by a factor of two, Indian by a factor of 1.4, etc.

It is perhaps less expected that people who gained the least were almost entirely from the mature economies — OECD members that include also a number of former communist countries. But even when the latter are excluded, the overwhelming majority in that group of “losers” are from the old, conventional rich world. But not just anyone from the rich world. Rather, the losers were predominantly the people who in their countries belong to the lower halves of national income distributions. Those around the median of the German income distribution have gained only 7% in real terms over 20 years; those in the US, 26%. Those in Japan lost out in real terms.

Figure 1 Real per capita income of the second income decile in the US and the eighth urban income decile in China between 1988 and 2011>>>>>

Lakner and Milanovic said that a dramatic way to see the change brought by globalisation is to compare the evolution over time of the second US income decile with (say) the Chinese urban eighth decile.

Indeed we are comparing relatively poor people in the US with relatively rich people in China, but given the income differences between the two countries, and that the two groups may be thought to be in some kind of global competition, the comparison makes sense. Here we extend the analysis to 2011, using more recent and preliminary data. While the real income of the US second decile has increased by some 20% in a quarter century, the income of China’s eighth decile has been multiplied by a factor of 6.5. The absolute income gap, still significant five years ago, before the onset of the Great Recession, has narrowed substantially.

First Industrial Revolution

The Industrial Revolution that began in Britain in the latter part of the eighteenth century and then spread to Western Europe and North America was not a sudden take-off in economic performance, but a continuation of the growth record since the Late Middle Ages.

The economists Ralf R. Meisenzahl and Joel Mokyr said in a 2012 paper that the technological change was driven by a small number of inventors coupled with innovators who were the applied craftsmen of the mechanical elite and are called "tweakers" as they adapted and improved the inventions for use by manufacturers.

Pay was high in England giving an incentive to mechanise production but according to Jan de Vries, the economic historian: "Efforts to calculate real wages, whether in England or other western countries, have rarely yielded much evidence for increased purchasing power, and in the core period of the Industrial Revolution, at least until 1820, they usually show deterioration."

It was slow change but before 1750 in Europe's leading economies, periods of growth were inevitably followed by retrenchment and stagnation.

Joel Mokyr, who is a professor of economics at Northwestern University, has written:

The Industrial Revolution was "revolutionary" because the technological progress it witnessed and the subsequent transformation of the economy were not ephemeral events and moved society to a permanent different economic trajectory. Moreover, it seems too much to demand that an event qualify as a revolution only if it follows a period of total stasis — most political revolutions cannot meet this standard either. Furthermore, revolutions are measured by the profundity and longevity of their effects. In this regard, what happened in Britain after 1760 is beyond serious doubt. The effects of the Industrial Revolution were so profound that, as Paul Mantoux notes, few political revolutions had such far-reaching consequences. [ ]

What the Industrial Revolution meant, therefore, was that after 1750 the fetters on sustainable economic change were shaken off. There were lags and obstacles to overcome before technological creativity and entrepreneurship could be translated into sustained economic growth and higher living standards, but the secular trend pointed clearly upward. What ultimately matters is the irreversibility of the events. Even if Britain's relative position in the developed world has declined in recent decades, it has remained an urban, sophisticated society, wealthy beyond the wildest dreams of the Briton of 1750 or the bulk of the inhabitants of Africa or Southern Asia in our own time. Britain taught Europe and Europe taught the world how the miracles of technological progress, free enterprise, and efficient management can break the shackles of poverty and want. Once the world has learned that lesson, it is unlikely to be forgotten.

According to an Economist special report (pdf; sources), before the Industrial revolution, wealth gaps between countries were modest: income per person in the world’s ten richest countries was only six times higher than that in the ten poorest. But within each country the distribution of income was skewed. In most places a small elite lorded it over a mass of peasants. There was little social mobility except...through marriage. Colonial America was an exception to this feudal sclerosis. Research by Peter Lindert and Jeffrey Williamson shows that on the eve of the American revolution incomes in the 13 colonies that formed the United States were more equal than in virtually “any other place on the planet.”

In 2013, former colleagues of Angus Maddison, the late British economic historian who had published estimates of gross domestic product per capita from the start of the Christian Era in 1AD, revised some of the estimates. The economists wrote:

there was a ‘little divergence’ within Europe between 1300 and 1800: real wages in the North Sea area more or less stabilized at the level attained after the Black Death, and remained relatively high (above subsistence) throughout the early modern period (and into the 19th century); whereas, on the other hand, real wages in the ‘periphery’ (in Germany, Italy, Spain) began to fall after the 15th century and returned to some kind of subsistence minimum during the 1500-1800 period; this ‘little divergence’ in real wages mirrors a similar divergence in GDP per capita: in the ‘periphery’ of Europe there was almost no per capita growth between 1500 and 1800 (or even decline), whereas in Holland and England real income continued to rise and more or less doubled in this period — the high real wages attained in England and Holland also stand out in a wider international comparison: in the 18th and 19th century real wages in various parts of China, India, Japan and Indonesia were at best half the level attained in North-Western Europe, thereby the confirming GDP estimates which suggest a (similar) gap between these parts of the world.

In a paper in 1988, Brad De Long, now a professor of economics at the University of California, Berkeley, showed that most poor countries of the world had failed to catch up to the rich countries since 1870. In contrast the leading economies of Western Europe, the US and Japan were moving ahead.

Economic convergence is a very slow process, which we reported on here in 2014 and in 2015 Prof De Long used a chart from our 2014 report in an article on China in the Huffington Post in 2015.

However, modern globalisation has enabled small economies like Ireland with limited natural resources to become rich.

In 2008 a report from the Commission for Growth and Development, a group sponsored by the International Bank for Reconstruction and Development and the World Bank said:

Since 1950, 13 economies have grown at an average rate of 7% a year or more for 25 years or longer. At that pace of expansion, an economy almost doubles in size every decade.

Growth of 7% a year, sustained over 25 years, was unheard of before the latter half of the 20th century. It is possible only because the world economy is now more open and integrated. This allows fast-growing economies to import ideas, technologies, and know-how from the rest of the world. One conduit for this knowledge is foreign direct investment, which several high-growth economies actively courted; another is foreign education, which often creates lasting international networks. Since learning something is easier than inventing it, fast learners can rapidly gain ground on the leading economies. Sustainable, high growth is catch-up growth. And the global economy is the essential resource. [ ]

As a point of departure we review the cases of high, sustained growth in the postwar period. Thirteen economies qualify: Botswana; Brazil; China; Hong Kong, China; Indonesia; Japan; the Republic of Korea; Malaysia; Malta; Oman; Singapore; Taiwan, China; and Thailand. Two other countries, India and Vietnam, may be on their way to joining this group. It is to be hoped other countries will emerge soon. These cases demonstrate that fast, sustained growth is possible — after all, 13 economies have achieved it.

They also show that it is not easy — after all, only 13 economies have ever done it. Indeed, some people view these cases as “economic miracles,” events impossible to explain and unlikely to be repeated. This report takes exception to that view. There is much to learn from outliers. Paul Romer, a leading growth theorist and a member of the Commission’s working group, reminds us that when Japan grew at this pace, commentators said it was a special case propelled by postwar recovery. When the four East Asian tigers (Hong Kong, China; Taiwan, China; Singapore; and Korea) matched it, skeptics said it was only possible because they were so small. When China surpassed them, people said it was only because China was so big.

More to come....

Chart on top: from Tomas Hellebrandt and Paolo Mauro: “The Future of Worldwide Income Distribution” working paper