A world of differences

4 Global inequality and policy solutions

Inequality between countries and global inequality

Most people think about inequality within their country’s borders, but we can also calculate inequality between countries and between all individuals on the planet.

Why this is important:

• With globalization, peoples’ lives are increasingly influenced by the lives of people in other countries.
• Through the internet, people have grown increasingly aware of what is going on in other countries and may compare themselves not just to their fellow citizens but to people halfway around the world.

Are there reasons to care more deeply about inequality within your own country than inequality around the world, and vice versa?

inequality between countries

A measure of inequality between countries that relies on national average incomes rather than individual incomes.

Some countries are very affluent on average, while others are much less so. To measure inequality between countries, there are two approaches. First, we can compute a measure of average income for each country (see for example the hockey stick charts in Unit 1 of The Economy 1.0). From there, we could calculate the Gini coefficient, or any other statistical measure of inequality, treating each country like an individual having the average income for that country. This may be useful if you are strictly concerned with national comparisons and want to give each country equal representation in your calculation, but it does not account for the incredible variation in population size across countries. Iceland, for example, has fewer than 400,000 people, while the population of India exceeds 1.3 billion. Under the first approach, a rise in average incomes in Iceland will count just as much as an increase in average incomes in India, despite the fact that a billion more people are likely to be impacted by the latter change.

A second approach to measuring inequality between countries is exactly the same as the first, but weights each country according to its population size. Note that the Gini coefficient calculated using the first approach could rise at the very same time that the Gini coefficient calculated using the second approach could fall. This, in fact, happened during the last two decades of the twentieth century as India and China (the two largest countries in the world) experienced accelerated economic growth.

Use CORE’s interactive skyscraper visualization to look at income differences within and across countries from 1980 to 2014.

global inequality

An estimate of income or wealth inequality among all people on the planet.

Finally, what economists refer to as global inequality is inequality measured by comparing the incomes or wealth of all people on the planet. Instead of resorting to average national incomes, global inequality tries to incorporate differences within each country as well. This, of course, is a far harder task, because it is extremely challenging to collect and compare data for households who use different currencies and face very different prices. Incredibly, there have been efforts to do this, and there are reliable estimates of global inequality reaching back to about 1980. Global inequality gives us the fullest picture of income differences around the world and allows us to think not only about differences between rich and poor countries, but also differences between the rich, poor, and middle-class in one country relative to another. To see how global inequality has changed over the last few decades and to learn more about the difference between global inequality and inequality between countries, turn to the section on Inequalities between and within countries in Unit 19 of The Economy 1.0.

Exercise 8 Local and global income distributions

Go to CORE’s global income inequality visualization and select up to 5 countries of your choice, for the year 2014. Use the ‘Skyscraper plot’, ‘Lorenz curves’, and ‘Rich/poor income ratios’ tabs in the visualization to describe some similarities and differences between the income distributions of your chosen countries.

Policies to address inequality

Taxes and transfers can have unintended consequences, which in turn alters decisions that affect market income. See Section 3.9 of Economy, Society, and Public Policy for a specific example.

predistribution policy

Government actions that affect the endowments people have and their value, including the distribution of market income and the distribution of privately held wealth. Examples include education, minimum wage, and anti-discrimination policies. See also: redistribution policy.

redistribution policy

Taxes, monetary, and in-kind transfers of the government that result in a distribution of final income that differs from the distribution of market income. See also: predistribution policy.

Policies to address inequality can take two forms: pre-distribution of market income and redistribution. Policies that focus on pre-distribution change prices and wages in the market so that people’s incomes are less widely dispersed. This includes policies such as the minimum wage, protection of unions, land reform, and expansion of educational access and quality. Policies that focus on redistribution take the market wages and prices as given, but try to redistribute income using the tax system. A wide variety of taxes are in place in almost every contemporary economy, and they have different effects on inequality.

For a global comparison of inequalities in market and disposable income, see Section 5.12 of The Economy 1.0.

In prosperous countries, the primary tools for redistribution are income taxes and government expenditures. In general, more affluent individuals are taxed at higher rates than those who are less affluent, though quirks and loopholes in the tax code exist that individuals of considerable wealth can exploit. Tax revenues, in combination with government borrowing, are used to fund public goods and transfers to the poor and unemployed. The after-tax income distribution is thus more equal than the pre-tax distribution.

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https://books.core-econ.org/insights/a-world-of-differences/04-global-inequality-and-policy-solutions.html#figure-3

Figure 3 Disposable and market income inequality in the US and Sweden 1979–2013

Incomes across the distribution database, Gini (2016), OWiD.

To learn more about predistributive policies, see Section 19.8 of The Economy 1.0. For more details on redistributive policies, see Section 19.10 of The Economy 1.0.

This can be seen in Figure 3, which shows the evolution of inequality in market income and disposable income in the United States and Sweden over the past few decades, as measured by the Gini coefficient. While inequality has been rising according to both measures, disposable income is more equally distributed. Furthermore, while market income inequality has been close in the two countries, disposable income inequality has been consistently greater in the US. This difference reflects Sweden’s far more progressive fiscal system, which taxes higher incomes at a higher rate, and redistributes it to low income citizens as well as supplying public goods.