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Inequality in the world economy--by the numbers.

Article Excerpt
An Interview with Branko Milanovic

BRANKO MILANOVlC is lead economist in the World Bank research group and visiting professor at the School for Advanced International Studies at Johns Hopkins University. He has conducted cutting-edge research on the scale of inequality in the world economy. His work can be accessed on the web at:

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Multinational Monitor: Globally, is economic inequality rising, staying the same or diminishing?

Branko Milanovic: To answer requires distinguishing between three different concepts.

Concept one: If we treat every country as a unit, the differences between mean incomes of the countries are unambiguously rising over the last 20 years, and even over the last 50 years. In other words, countries are diverging.

Concept two: If, as before, we treat each country as a unit but give a weight to each country equal to its population, then inequality has been declining over the last 20 years.

That concept two is a useful one, but it is not really the one we want to study, because it is only an approximation to concept number three: the inequality of all individuals in the world. This measure of inequality takes each individual as equally important, gives to each the same weight, and adjusts for differences in price levels between the countries. It is the most difficult concept to calculate, not the least because we didn't have, or had only very fragmentary, data on national income distributions for many countries until very recently. These national distributions are necessary if we want to derive a world distribution of income across individuals.

Now, regarding concept three, we can say that inequality is extremely high. Everybody agrees on that. It is more difficult to say whether it is rising. I think that the preponderance of evidence is that it is slightly increasing or that it displays no clear trend over the last 20 years.

MM: When you are measuring inequality, are you looking at income or wealth?

Milanovic: In each case, we are looking at income, or more exactly income and/or expenditures. In other words, we are always looking at people's current welfare. We do not have measures of assets or wealth simply because there are no surveys of wealth in most of the world.

MM: Do you have any intuition of what you would find if the data existed on assets and wealth?

Milanovic: It is very difficult to say that, but within nations inequality of wealth is always higher than inequality of income. Income is the result of work and investment done over a year and income differences are the product of people's current jobs, investment luck, life cycle effects and so forth. Inequalities of wealth, that is inequalities in actual ownership of real and financial assets, are much greater because they are essentially due to several generations accumulating assets, or to the accumulation of assets over one's entire life. Thus annual differences in income are basically cumulated to produce much larger wealth differences.

MM: To return to the three different approaches to assessing global inequality, what makes for such different results? What role does China play?

Milanovic: What makes for such different results is that the units of observation are different. In concepts one and two, we're basically looking at each country as a unit and then assuming that there is no inequality within a country. So each Chinese has the mean income of China, each American has the mean income of the United States. We ignore inequalities within nations; that is, we present a much simplified picture of actual inequality.

The difference in results between concepts one and two for the most recent period is precisely due to the role of China. China, and to a lesser extent India, have grown very fast during the last 20 years. Since they started as very poor countries, and indeed very populous countries, they have reduced the distance between their own GDP per capita and the world's average or median income. This, when we use population weights, has contributed to reducing inequality as expressed by concept two.

Most people stop at that point. They say that since China was very poor, and since it is a large country that has grown fast, it must have reduced inequality. So far so good. But then we have to go one step further and ask, What has happened to inequality within China? As a matter of fact, inequality in both China and India has increased significantly.

When we add that component, and...