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Debate about global income inequality trends – Firebaugh response to Wade critique

July 2, 2008//Inequality papers/Firebaugh-Goesling AJS/

Comment on “Debate About Income Inequality” in the UC Atlas of Global Inequality

The “Debate About Income Inequality” is over whether inequality in income across all the world’s citizens (called “global income inequality”) is rising or falling. The UC Atlas discussion of this debate begins by summarizing a 2004 article in the American Journal of Sociology in which Brian Goesling and I used as our point of departure the finding of several earlier studies that global income inequality has declined since about 1980. The aim of our article was not to demonstrate that global inequality had declined but, instead, to identify the leading contributors to change in global inequality from 1980-1998. Here’s what we found (Table 5 of the article):

• Equalizing: The most important factors working to reduce global inequality were faster-than-world average income growth in China and South Asia and slower-than-world average population growth in the Western offshoots (Australia, Canada, and the United States).
• Disequalizing: The most important counter-forces working to worsen global inequality were stagnating economic growth, and faster-than-world average population growth, in sub-Saharan Africa, and faster-than-world average income growth in the Western offshoots.

These findings stand up regardless of whether, on net, the equalizing forces are more powerful than the disequalizing forces.

But it is the “on net” that people want to know about – Is global inequality rising or falling? Hence noted political economist Robert Wade, in his comment on our article, focuses on our reference to what we called the “mounting evidence” in other studies that global income inequality had declined in the last decades of the twentieth century.

The gist of Wade’s comment is that present data simply don’t permit confident claims about the direction of change in global inequality – a rather dramatic shift in his earlier thinking about change in global income inequality, where he had declared confidently that “global inequality is worsening rapidly” (Wade 2001, p. 72) and that “new studies show … a rapid rise in inequality” (p. 73).

Wade is in good company in recanting his earlier claim that global inequality is “worsening rapidly” and, indeed, in providing a note of caution about any unqualified claim about the direction of change in global income inequality. In a recent issue of the Journal of Economic Literature, Sudhir Anand and Paul Segal provide a very thorough and balanced review of evidence on the trend in global income inequality. Their last sentence tells it all: “We conclude that there is insufficient evidence to reject the null hypothesis of no change in global interpersonal inequality over 1970-2000” (Anand and Segal 2008, page 91). In other words, the equalizing and disequalizing forces identified in Firebaugh and Goesling (2004) have offset – or at least the forces are close enough to offsetting that we cannot tell which one is the stronger, given the level of uncertainty in our income estimates.

To appreciate the implications of the last point, note that, if a signal is strong enough, even a weak instrument will tend to pick it up. With respect to global income inequality, then, even with highly imperfect income data we would consistently detect a severe disequilibrium in equalizing and disequalizing forces. Because results across studies are not consistent, we can rule out claims of precipitous change in either direction. That fact is important, because less than a decade ago it was not uncommon to read claims that global inequality was “exploding” or at least “worsening rapidly.”

If the overall trend in global inequality isn’t knowable, what are the right questions?

If we agree that with current data we cannot determine, with any degree of confidence, whether global income inequality is growing or receding, what then? Two good answers are given in the concluding section of the UC Atlas “Debate about income inequality.” First, “the scale of contemporary global inequalities is so large that small changes in inequality are neither here nor there.” Second, “income is only one element of poverty; ill-health, powerlessness and exclusion, and many other factors, are also important.”

I want to offer a third answer. A few years ago I was asked to give a talk at Harvard’s Sociology Department on the evolution of global income inequality. I argued that the fixation on whether global income inequality is rising or falling is misplaced because it misses the singular feature of global income inequality today: Its changing contour. Beginning in the late 18th century and for nearly two centuries thereafter, richer regions of the world led the way in economic growth, resulting in massive between-region and between-nation inequality. Income inequality within nations, by contrast, remained relatively constant or (in some instances) declined with the rise of middle classes.

In today’s world the richer regions are no longer the growth leaders. Large poor countries such as China and India are experiencing faster income growth than rich Western nations. At the same time, inequality is rising within many, but not all, countries in the West and elsewhere.

So we have a reversal of a longstanding trend, from rising inequality across nations and constant or declining inequality within nations, to declining inequality across nations and rising inequality within them. That’s the message of my 2003 book The New Geography of Global Income Inequality.

The contour of this new geography of global income inequality – inequality rising within nations and declining across nations – implies that the link between nationality and income will diminish over time. If present trends persist we will see a continuation of the decline in inequality across nations until average incomes in the large poor nations of Asia begin to approach the world average, so any growth in global inequality in the near future necessarily will be due to rising inequality within countries. Because inequality is declining across nations and rising within them, in tomorrow’s world your income will depend less on your nationality than it does today – but it may well depend even more on your occupation and level of education. Those are important issues that should attract the attention of students of global income inequality (see New Geography for further discussion).

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