fbpx
01 / 05
Global Income Inequality Is Declining

Blog Post | Personal Income

Global Income Inequality Is Declining

In recent decade, global inequality has started to decline.

Global income inequality is declining

Barack Obama once referred to income inequality as “the defining challenge of our time.” And, to be fair to the former U.S. President, income inequality within countries has been increasing in recent decades. Some reasons for that increase, such as corrupt dealings between politicians and crony capitalists, are deplorable and should be stopped. Others are, probably, unavoidable. Increasingly, for example, men and women find their life partners in college or grad school. Their households tend to be richer and their children more fortunate. That leads to greater income and social stratification that, being voluntarily entered into, should not be interfered with by the state. Income inequality on a national level, in other words, is unlikely to go away. International or global inequality, in contrast, is declining.

Humanity is some 300,000 years old and while it is true that the material circumstances of our distant ancestors were much more equal than is the case today, almost everyone lived in extreme poverty. The wealth accumulation among nomadic hunter-gatherers, explains Steven Pinker in his book Enlightenment Now: The Case for Science, Humanism and Progress, was circumscribed by the weight and volume of the physical possessions that they could carry on their backs. Life among sedentary hunter-gatherers was more unequal. They “developed hereditary nobility who kept slaves … [and] hoarded luxuries.” Social stratification accelerated following the agricultural revolution some 12,000 years ago. As more people settled down, city states and, later, empires emerged. These early polities developed ruling classes (nobles, priests, bureaucrats, etc.) who tended to be much better off than the rest of the population. That said, even the richest and most powerful people of the past could not begin to imagine of the riches and conveniences enjoyed by ordinary people today.

Inequality, explains Princeton University economist Angus Deaton in his book The Great Escape: Health, Wealth, and the Origins of Inequality, is the handmaiden of progress. It is only when some people become better off that a higher standard of living becomes imaginable and, consequently, achievable. That is precisely what happened during the Industrial Revolution, when a pronounced income gap started to emerge between the countries of Western Europe and North America on the one hand and the rest of the world on the other hand. In 1775, for example, U.S. gross domestic product per person stood at $1,883. In 2016, it stood at $53,015 – a 27 fold increase in the real standard of living (figures are in 2011 U.S. dollars). The economic divergence between the West and the Rest, which took off during the 19th century, continued well into the 20th century. In recent decades, however, global inequality started to decline. That did not happen due to declining incomes in rich countries. Most of those have recovered from the Great Recession and are at an all-time high. Rather, it happened due to quicker growth in non-Western countries, which have benefited from internal economic reforms, including the end of central planning, and globalization of trade, services and financial flows.

Source: Branko Milanovic, City University of New York.

The most commonly used indicator of income inequality is the Gini coefficient, which measures income inequality on a scale from zero (i.e., all incomes are equal) to 1 (i.e., one person has all the income). One way to measure global income inequality, explains Branko Milanovic from City University of New York, is to calculate a population-adjusted average of Gini values for all individual countries. As can be seen, the decline in global income inequality started in the 1980s and is coterminous with a period of greater economic freedom and interconnectedness known as “globalization.” This measure of income inequality, let’s call it inequality between countries, is somewhat misleading, however, for it assumes that everyone within any given country earns the same income. To get a sense of inequality across the human race, income inequality between countries has to be adjusted by income inequality within countries. On that measure, global income inequality begins to decline somewhat later – after the beginning of the new millennium. Still, both measures of global income inequality show a downward trend. As such, Milanovic concludes, “We are witnessing the first decline in global inequality between world citizens since the Industrial Revolution.”

Some might feel that a decline in global income inequality is a good thing in and of itself. Others, myself included, celebrate better schooling, healthcare, sanitation and nutrition that globalization and rapid economic growth in developing countries made possible.

Blog Post | Economic Growth

Measuring Freedom and Flourishing | Podcast Highlights

Chelsea Follett interviews Leandro Prados de la Escosura about the long term trends in wellbeing, inequality, and freedom.

Listen to the podcast or read the full transcript here.

Let’s discuss your latest book, Human Development and the Path to Freedom.

I have spent many years working on economic performance in the long run, and while I don’t have anything against GDP, I was always uneasy with the idea of using GDP per head as a shortcut for wellbeing. GDP is a good indicator of output but a very deficient indicator of wellbeing.

Most economists say, “This is true, but it’s highly correlated with non-economic dimensions of wellbeing.” There is also a tendency to produce a dashboard of indicators, basically GDP and some additional measures that create a more nuanced picture.

I was unhappy with that. Then I realized that, since the beginning of modern national accounts in the 1950s, there have been attempts to produce alternative measures. More than 30 years ago, the United Nations Development Programme produced the Human Development Index. I was very interested, but at the same time, I was frustrated when I saw that countries with no freedom at all ranked very highly in the index.

For example, in the first report in 1990, they had a retrospect going back to 1975, and I found that Spain, under Franco’s dictatorship, ranked very highly in human development. How come? It wasn’t satisfactory to rank a nasty dictatorship so highly. And then I read the literature accompanying the report and found this very candid assertion: “The purpose of human development is to increase people’s range of choices. If they are not free to make those choices, the entire process becomes a mockery.”

This is an important philosophical point: Human development is not just about living longer or having a higher material standard of living. You can get that in a high-security prison in Norway. Choosing between alternative ways of life is what makes the difference.

To make a long story short, they have tried time and again to introduce freedom, but they never managed to do so because of strong political opposition from country members of the program. So, as an independent scholar, I thought, “Look, nobody is going to read it, but I have the freedom to introduce the freedom dimension.”

Tell me about what you found.

Perhaps what makes sense is to compare what I found to what you would get on the basis of per capita income. If you look at the average increase from 1870 to 2020, the growth in income and wellbeing is very similar.

But if you look closer, you realize there are large differences across different periods. During first globalization before 1913 and between 1970 and 2000, they are relatively close. During the last two decades, the difference is huge in favor of material living standards measured by per capita income. The first part of the 20th century is just the opposite.

What next? Well, try to provide an explanation.

I went in two steps. One was asking, “Why has this growth in human wellbeing happened? What is the intuition?” The intuition is that if you get richer, you’re going to become better fed, healthier, better educated, and freer. But you can also have different levels of wellbeing at the same income level, and the most important finding from a historical perspective is that at any point of income, you have higher wellbeing today than in the past.

If you compare 1870 to 1913, you see that for most of the income levels, you get the same association between health and income, but at high levels of income, you get higher levels of health. Improvements in health techniques and medical knowledge were restricted to the most advanced countries. But if you look at the 1950s, at any income level, you get higher levels of health than in 1913 or 1870. You also find this for education and freedom. If you move to 2000, there is another upward shift.

Of course, there are reversals. There have been four moments in time in which the progression, the positive progression of human development stopped or declined. One was the Great Depression. The second one was during Mao’s Great Leap Forward. Then there were the oil shocks in the early ’70s, but the most damaging one has been COVID. COVID is the first period in which wellbeing measured in terms of augmented human development has declined

However, over the long run, for any income level, whether you are rich or poor, nowadays you have higher wellbeing than in the past.

Those findings are fascinating. What would you say is the biggest implication of your work?

The first thing is that wellbeing, broadly defined, has expanded worldwide more steadily than per capita income.

Secondly, the phases in which we conventionally associate improvements in wellbeing are not necessarily the same as those in which actual wellbeing improved. For instance, there was an important improvement in the so-called interwar period, even though economic growth stagnated. In 20th-century India, before independence, there was a stagnation in real average income but a remarkable improvement in health. This was because of the discovery of the germ theory of disease, which brought simple hygienic practices like washing your hands before eating and not sleeping near animals.

We also tend to forget that the association between wellbeing and income is not fixed. There are movements along the function: if you are richer, other things being equal, you’re going to be healthier, more educated, and freer. But this is not the whole story. There are also upward and downward shifts.

For instance, you could say that in terms of freedom in 2020, we are worse off than we were 20 years ago. This doesn’t mean that people were richer 20 years ago—we’re richer now—but at the same income level, 20 years ago, people were freer than we are today.

So, it’s a nuanced picture. Overall, things are improving, but there are also worrying declines in freedom.

Exactly.

Can you talk about inequality?

In 1870, in the case of wellbeing, inequality was high, and it increased up to the end of the century, then went down. Then, because of World War I, it increased again. But from the late 1920s to the present, with the exception of a reversal because of World War II, there has been a steady decline in inequality of wellbeing.

In the case of per capita income, inequality increased until the end of the 20th century, around 1980, and only began declining after 1990.

Here, I’m referring to relative inequality. If we increase wealth by 10 percent everywhere, inequality in relative terms doesn’t change. Some people are a bit pickier and think, “If my income increases 10 percent and my income is 100, I get 110. If your income is 1000, you now get 1100.” This is absolute inequality.

Relative inequality in per capita income increased until 1980 and has declined since 1990. But absolute inequality in per capita income, the distance between rich and poor, continues growing.

Absolute inequality in wellbeing has declined since 1960. Today, it is similar to what you would find in 1938, 1913, or 1900, but higher than in 1870.

It’s also important to look at what happens to different parts of the distribution. Who are the winners and losers? Broadly speaking, the middle class of the world gained the most, and the lower classes and those at the top won relatively less. If you look at absolute gains, those who were at a higher level of wellbeing got more. But that changes for different dimensions. Those at the bottom, for example, were the main winners in terms of education, while those in the middle were the main winners in terms of health.

I know that your current focus is on freedom. Could you tell me a little bit about that?

I became interested in human development after reading Amartya Sen, who emphasizes what Isaiah Berlin would call positive freedom. Freedom to. But he also emphasizes negative freedom, the absence of coercion and interference. And I think this is interesting because many people think there is a trade-off between negative and positive freedom.

At the end of the day, everybody wants to have negative freedom, but there are those who think negative freedom has nothing to do with income, that would be Hayek, and those who think negative freedom can only be reached as a second stage once you provide for those who don’t have access. For some, positive freedom is a socialist lie to reduce negative freedom. For others, they are two faces of the same coin.

As an economic historian, I find this is an interesting topic for research. If you look at the world, and you can see this in the Human Freedom Index that Cato publishes, you see the countries at the top in terms of negative freedom are also at the top in terms of positive freedom. For instance, Denmark is at the top of the list in terms of economic freedom, but also in terms of education and health.

My question was, well, maybe this trade-off is only a short-run phenomenon. Maybe if you look at the long run, the trade-off doesn’t hold or only holds for a certain period. So why not construct two alternative sets of estimates, one for positive freedom and the other for negative freedom? And this is what I’m trying to do now.

My main discrepancy with the Fraser Institute economic freedom index is that I don’t take into account the size of government. I know this is a contentious issue. People say, “the larger the government, the less room for private initiative.” At a point in time, this is true. And if you look at similarly developed countries, this is true.

But if you take a cross-section at a point in time, you can see that there are countries in which the size of government is much, much smaller, that are not necessarily freer, in terms of absence of coercion and interference, than countries with larger governments. Look at, for instance, Latin American and Sub-Saharan African countries. Think of Somalia. Or think of my own country under Franco. It was a right-wing, but, in many aspects, very socialist dictatorship in which the government was everywhere. But the size of government was very small.

In 1980, do you know what percentage the income tax contributed to the revenues of the central government in Spain? Give me a figure. You would say 40 percent?

Sure, 40 percent.

2 percent.

Wow.

Nobody paid income tax. So, there was no redistribution.

My point is that the size of government matters less than the nature of government. Perhaps Denmark would have more economic freedom with a smaller government, but if you compare Denmark to other countries, you can see that even though the Danish government is larger, Denmark’s degree of economic freedom is higher. Why? Because the nature of government action is different. It doesn’t interfere as much as another government that is less intrusive in quantitative terms but more intrusive in qualitative terms.

So, if you are looking at a point in time, it makes sense to say, “mutatis mutandis, if a rich country nowadays has a smaller government, this country is going to be freer.” That is true. But the action of government varies from one case to another.

Get Leandro Prados de la Escosura’s book, Human Development and the Path to Freedom: 1870 to the Present, here.

The Human Progress Podcast | Ep. 48

Leandro Prados de la Escosura: Measuring Freedom and Flourishing

Leandro Prados de la Escosura, an emeritus professor of economic history at Carlos III University in Spain, joins Chelsea Follett to discuss long term trends in wellbeing, inequality, and freedom. To see the slides that accompany the interview, watch the video on YouTube.

Blog Post | Human Development

1,000 Bits of Good News You May Have Missed in 2023

A necessary balance to the torrent of negativity.

Reading the news can leave you depressed and misinformed. It’s partisan, shallow, and, above all, hopelessly negative. As Steven Pinker from Harvard University quipped, “The news is a nonrandom sample of the worst events happening on the planet on a given day.”

So, why does Human Progress feature so many news items? And why did I compile them in this giant list? Here are a few reasons:

  • Negative headlines get more clicks. Promoting positive stories provides a necessary balance to the torrent of negativity.
  • Statistics are vital to a proper understanding of the world, but many find anecdotes more compelling.
  • Many people acknowledge humanity’s progress compared to the past but remain unreasonably pessimistic about the present—not to mention the future. Positive news can help improve their state of mind.
  • We have agency to make the world better. It is appropriate to recognize and be grateful for those who do.

Below is a nonrandom sample (n = ~1000) of positive news we collected this year, separated by topic area. Please scroll, skim, and click. Or—to be even more enlightened—read this blog post and then look through our collection of long-term trends and datasets.

Agriculture

Aquaculture

Farming robots and drones

Food abundance

Genetic modification

Indoor farming

Lab-grown produce

Pollination

Other innovations

Conservation and Biodiversity

Big cats

Birds

Turtles

Whales

Other comebacks

Forests

Reefs

Rivers and lakes

Surveillance and discovery

Rewilding and conservation

De-extinction

Culture and tolerance

Gender equality

General wellbeing

LGBT

Treatment of animals

Energy and natural Resources

Fission

Fusion

Fossil fuels

Other energy

Recycling and resource efficiency

Resource abundance

Environment and pollution

Climate change

Disaster resilience

Air pollution

Water pollution

Growth and development

Education

Economic growth

Housing and urbanization

Labor and employment

Health

Cancer

Disability and assistive technology

Dementia and Alzheimer’s

Diabetes

Heart disease and stroke

Other non-communicable diseases

HIV/AIDS

Malaria

Other communicable diseases

Maternal care

Fertility and birth control

Mental health and addiction

Weight and nutrition

Longevity and mortality 

Surgery and emergency medicine

Measurement and imaging

Health systems

Other innovations

Freedom

    Technology 

    Artificial intelligence

    Communications

    Computing

    Construction and manufacturing

    Drones

    Robotics and automation

    Autonomous vehicles

    Transportation

    Other innovations

    Science

    AI in science

    Biology

    Chemistry and materials

      Physics

      Space

      Violence

      Crime

      War

      Blog Post | Food & Hunger

      Time Equality Is Increasing Dramatically

      Instead of comparing differences in income between people, we should compare how we spend our time today versus yesterday.

      Summary: A common way to measure inequality is by comparing differences in income between people or countries. However, this approach may overlook a more important dimension of human well-being: how we spend our time. Using data from the World Bank, this article shows that time inequality has dramatically declined over the past six decades.


      The Canadian psychologist Jordan Peterson notes that you should “compare yourself to who you were yesterday, not who someone else is today.” Since we all get exactly 24 hours a day, and no one can really buy time (otherwise, rich people would never die), it might also be better to compare differences in how we spend our time. Instead of comparing differences in money income between people, we should compare differences in how we spend our time today versus yesterday.

      According to the World Bank, in 1960, nominal gross domestic product (GDP) per capita in China was $89.50. By 2021, it had increased by 13,929 percent to $12,556. Over the same period, nominal GDP in India increased by 2,671 percent from $82.19 to $2,277.43, and in the United States, it increased from $3,007 to $69,287, or by 2,204 percent.

      Chinese GDP per capita grew six times faster than the U.S. GDP per capita. The ratio of China to U.S. GDP per capita in 1960 was 33.6. By 2021, it had fallen to 5.52. The ratio of India to U.S. GDP per capita in 1960 was 36.6. By 2021, it had fallen to 30.4. China is making pretty good progress, but there is still a significant gap in GDP per capita.

      Perhaps a better way to compare inequality is with time. Let’s start with the time to earn the money to buy a basket of basic food. The World Bank tracks the nominal price of rice, wheat, and maize (corn). These three commodities represent the most common sources of calories around the planet. An index of the nominal prices indicates an increase of 418 percent from a base value of 1 in 1960 to 5.18 in 2021.

      Comparing the cost of this three-food index to GDP per capita in China over this period indicates a 96.3 percent decrease in the time price. Put differently, if the Chinese needed to work eight hours to earn the money to buy their food in 1960, they only needed to work around 18 minutes in 2021. For the time it took to buy one unit in the three-commodity basket in 1960, they would get 27 units in 2021. The Chinese gained 7 hours and 42 minutes a day to devote to other activities.

      The time price of a three-commodity basket fell by 81.3 percent in India. Indians who might have needed to work eight hours to buy their food in 1960, needed to work only around 90 minutes to do the same in 2021. For the time it took them to buy one unit in the three-commodity basket in 1960, they got 5.35 baskets in 2021. Thus, they gained 6 hours and 30 minutes a day.

      In contrast, using the three-commodity basket as an index, people in the United States, who may have had to work an hour a day to earn enough money to buy their food in 1960, only needed to work around 13.5 minutes to do the same in 2021. The time price of the three-commodity basket fell by 77.5 percent. For the time it took them to earn enough money to buy one unit in the three-commodity basket in 1960, they got 4.45 baskets in 2021. Americans gained 46.5 minutes a day to devote to other activities.

      From this perspective, the difference (or time gap) amounted to 420 minutes between Chinese and Indians on the one hand and Americans on the other hand in 1960. By 2021, the time gap dropped to 76.5 minutes for Indians and 4.5 minutes for Chinese. For every minute Americans gained, Chinese gained almost 10 and Indians gained 8.4. Time inequality has dramatically declined.

      As new knowledge and innovation decreases the time price of basic food items, people have much more time to devote to other activities, including leisure and learning. And when people have the time to get on learning curves and discover new knowledge, we all benefit.

      You can learn more about these economic facts and ideas in our new book, Superabundance, which is available at Amazon.