SO478 - week 2

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These are my notes from October 03 for SO478 at the London School of Economics for the 2017-2018 school year. I took this module as part of the one-year Inequalities and Social Science MSc program.

The usual disclaimer: all notes are my personal impressions and do not necessarily reflect the view of the lecturer.

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Global inequalities

Readings

Income inequality in the developing world by Martin Ravallion

Summary: income inequality in developing world less than 30 years ago, but this is mostly due to falling inequality between countries (as those on the bottom, esp China, catch up) whereas inequality within countries is slowly rising (though flat since 2000).

• since the start of developmental economics in the 50s, inequality was seen as unavoidable, a secondary concern to growth; it was feared that to reduce inequality was to reduce growth (Rawls’ difference principle was often used to justify this POV)
• overall inequality measures in the developing world usually pool together every single person, ignoring country boundaries (and thus obviously obscuring different trends)
• mean-log deviation: a scale-invariant measure of inequality (like all relative inequality measures)
  • log(mean income/household income per person), then take the mean of that
  • unlike Gini coefficient, it’s linearly decomposable by population subgroups (e.g., rural vs urban, or North vs South, or whatever you want to measure)—you can add the subgroup MLD values together to get the overall MLD value
  • measured with household surveys (and the obvious caveats apply there)
  • in 2010, the overall developing world MLD was 0.578
    • to illustrate what this means: if we had 3 people, one had an income of $1 and one had an income of $2, the third would need an income of over $12
• we usually focus on relative inequality, but absolute inequality is also important
  • recent perceptions of rising inequality are likely because we think in terms of absolute inequality, even if we measure in terms of relative
  • these are just different value judgments, one is not necessarily better than the other
  • for an absolute inequality measure, we need translation invariance
  • to illustrate the difference between abs/rel: if we find that growth does not change the share of income going to the poor, this does not mean an equal distribution of the income gains … given existing inequality, the rich will of course have greater absolute income gains
    • made-up example for my own edification: if the bottom 50% gets 10% of the income, and growth means that instead of $100 in total national income it’s now $120, then, assuming unchanging relative inequality, the bottom 50% will get $12 instead of $10, whereas the top 50% get $108 instead of $90
    • so the wealthy benefit a LOT more from growth unless relative inequality decreases substantially
    • and clearly this has major implications for the economy … scary

Who are the Global Top 1% by Sudhir Anand and Paul Segal

• study that uses a combination of survey and tax data to examine the global top 1% from 1988 to 2012
  • primarily from advanced economies (85%) but that percentage is falling
  • using wealth trackers by Forbes, Credit Suisse
• unlike the “global middle class”, the global rich are closer to constituting a class in themselves: converging culturally (somewhat), travelling to the same places, going to the same events (Davos), sharing financial knowledge
• the 2012 threshold: $50k USD per capita in household income (which seems exceptionally low to me—it’s right around the median US household income—but I guess that’s just false consciousness on my part)
  • Brazil has 1.5% of its population in the top 1%, which is the most of any developing country; in the developed world, it’s usually 4-8%
• for the global top 10%, the threshold is $15k USD per capita in household income (60% of the US and 70% of Switzerland are in here)
• there is no evidence that people at the economic bottom within a country benefit from their compatriots getting into the top 1% …
  • equivalently, having more women or minorities joining the elite class will not fix things; it will not embolden rather than challenge the power structure
• purchasing power parity adjustments for the global top 1% (which is, for the most part, a jetsetting class) is tricky—which country’s rates of PPP do you adjust with?
• thresholds change if you use wealth instead of income (per adult):
  • $710k USD per adult for the top 1% by household (wow)
  • in 2012, US citizens comprised 36% of the global top 1% by wealth; China 3%, and India 0.5%
• most income in the top 1% comes from salary/labour rather than capital gains (senior professionals, business owners: “supermanagers”)
  • tend to be senior executives who have more in common with each other than with their fellow countrymen

Global Income Distribution by Christoph Lakner and Branko Milanovic

Published in the The World Bank Economic Review. I have my own feelings on the World Bank but I’ll try to leave them aside when writing this review.

• surveys of household income in the developing world, 1988-2012
  • surveys over tax record data because it’s too sparse and unreliable in developing countries
  • still, these surveys have a tendency to underestimate inequality
• China as an outlier that skews overall stats, due to its huge population and unusual economic history: obviously its top incomes are quite high, but still a large middle class was lifted out of poverty

Lecture

Given by Dr Sudhir Anand, Professor of Economics at Oxford University, who co-authored one of the papers above. The lecture he delivered is primarily a summary of that paper.

• there’s a common perception (partly pioneered by the financial crisis & resultant Occupy-type movements) that economic growth and globalisation have resulted in higher levels of inequality, hence the reason we study it
  • recent announcement by the World Economic Forum that severe income inequality is a big problem (or, as the New York Times put, it “Davos Elite Fret About Inequality Over Vintage Wine and Canapés”)
  • some more stuff from people who helped to create the situation we’re in now:
    • Christine Lagarde: “Excessive inequality is corrosive to growth; it is corrosive to society.”
    • Credit Suisse has done lots of research into wealth inequality, top 1%
• wealth inequality is obviously higher than for income
  • at the upper end, we have stats for billionaires; more and more are coming from developing countries recently (which is, let’s just say, probably not great for those at the bottom in those countries)
  • at the lower end, of course, we have lots of people living in extreme poverty (usually defined as around a dollar a day—$1.25 USD as of 2008, as defined by the World Bank). incidentally, the fact that we define it in terms of a dollar amount per day (as opposed to access to particular services) speaks to the completeness with which capitalist realism and the hegemony of free markets have permeated our lives and transformed the way we think
• why do we care about global inequality?
  • some people (mostly living in rich countries) seem to think that justice should stop at country borders, as if these arbitrary and artificial constructs should delimit the boundaries of our ethical concerns
  • others recognise that reducing poverty globally should be a concern if we are to care about poverty at all
  • plus there’s the inconvenient truth that rich countries have benefited from globalisation at the expense of poor countries
    • consider the net transfers of wealth FROM the developing world TO the developed world throughout history, from the era of colonialism to the era of the Washington Consensus (Jason Hickel, in LSE’s anthropology dept, has written an excellent post on this for The Guardian)
    • a variety of international social arrangements help preserve the dominance of already-developed countries (think trade agreements, environmental concerns, attitudes toward debt)
    • hence the developed world has a moral responsibility to fix things (per Amartya Sen’s The Idea of Justice)
• for a thorough analysis, we’ll need to separate out inequalities within countries and inequalities between countries (can’t just lump them all into one)

Different methodological approaches

• Concept 0: between countries, using national income as the ranking variable and either the USD or PPP-adjusted dollars as the numéraire
• Concept 1: between countries, using national income per capita as the ranking variable and PPP$
• Concept 2: between individuals, using national income per capita as the ranking variable and PPP$
• Concept 3: between individuals, using actual household income per capita as the ranking variable and PPP$

The reason we care about national income on its own (not just per capita) is because it has some influence on a country’s authority and power when negotiating trade agreements and the like.

On PPP adjustments: obviously problematic in the sense of reducing a multidimensional vector to a scalar. Takes a typical “basket of goods” but of course the definition of that is subjective and, in the end, politically motivated (whether consciously or not). The same problem that arises when thinking about inflation.

On scaling household size: tricky topic with lots of different approaches and factors to consider (economies of scale, varying consumption patterns, cultural norms, etc). No real way to equalise across households so most research just makes assumptions about what a “household” means and isn’t too worried about how that aligns with reality.

China is an equalising force for concepts 1-3, but disequalising for concept 0 (because its national income is so high, and growing; but of course its national income per capita is still quite low).

For the paper, they looked at three different indices: Gini, MLD (also known as Theil L) and Theil T. The latter two are additively decomposable (not just into two components, but into any number, with weights). Incidentally, you can use variance as a measure of inequality; it’s just going to be an absolute measure, not a relative one.

Global Gini right now is 0.70,, which is much higher than in any individual country (speaks to how high inter-country inequality is right now).

Seminar

This was the first official seminar with our permanent seminar groups (last week was fairly ad-hoc). Focused on introductions (who we are, where we’re from, and some thoughts on inequality within our own countries). I talked about China (since Canada was taken) and its very unique position within the global inequality hierarchy: on one level, it’s been responsible for reducing worldwide income inequality via the lifting of such a large number of people out of poverty, but on another level income inequality is still staggeringly high. The rural-urban gap (which is responsible for, by some estimates, 10% of economic inequality within the country) is especially worrying, and I could see its consequences when I was living in Beijing—I, along with most of my international school friends, had various housekeepers during my time there, and they tended to be young women from rural areas (mostly Sichuan in my case) who gave up pretty much all their free time to live in someone else’s house and take care of the household while being paid a pittance. Which says something about their economic and social prospects where they came from. Among mainland citizens, 1% of the population controls 1/3 of all the wealth, which is quite scary.

Another thing to consider with China is its tumultuous recent history. During the Great Leap Forward, economic inequality was presumably lower, but a lot of people (especially my parents’ generation) were incredibly poor … It’s kind of obvious, but still deserves to be said: we can’t focus just on inequality measures when trying to understand the health of an economy. Any discussion of inequality ought to be accompanied by its proper geopolitical context, not to mention the level of economic development.

Some interesting statistics on inequality brought up by the other students:

• South Africa: 60% of income owned by top 10%; worse than most countries, and growing (even since 2008)
  • huge racial element to this of course
  • 30/55 million people live in poverty
  • unemployment at either 28% or 36% with the expanded definition (which includes those who are no longer looking for work)
  • under the age of 35, unemployment is at 70%
  • poverty declining due to social assistance grants
  • only 7 million people actually earn enough to pay income tax
  • the ratio of police:citizens is a great way to look at wealth disparities between cities: one wealthy, predominantly white town is 38:1 with very little crime, whereas a poor, predominantly black town will be closer to 1:1400 (with an exceptionally higher crime rate)
• Sweden: has been quite equal for a while, but inequality is (slowly) rising lately
  • the interesting thing about Sweden is that their economy was primarily agricultural for a while, but after some massive famines a lot of their population emigrated to the US
  • as a result, Sweden ended up creating a state modeled after the American one at the time
  • they never had a neoliberal drive à la Reagan/Thatcher so maybe that explains why things are so good now
• Ireland: most unequal in the EU pre-tax, but around average post-tax
  • has about 6 billionaires on Forbes’ list, several of whom appear to be residents for tax purposes …
  • recent poll proposing a tax bracket of 60% for incomes of 100k EUR; 60%+ in favour (awesome)
• London: most unequal part of the UK, driven by the wealth of the richest rather than the poverty of the poorest (the poor in London are generally doing better than elsewhere)
  • 90:10 ratio of 4:1. income fell post-crash, at a roughly similar level across the board (thus preserving the ratio)
  • most wealth in the form of property
  • housing crisis has been happening for ages but only really reported about since 2010 (when it started affecting journalists, presumably)
  • the construction of social housing has dropped 90% since 2010; instead, we have the cruelly-named “affordable” housing (usually 80% of local market rent which is still ridiculously high)

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