Is inequality increasing or decreasing? The answer depends on our point of reference. In America, the income gap between the top 1% and the rest has grown appreciably. It is true that most of us see our standards of living continue to improve through, for example, the falling prices of consumer goods: in 2002, a 42” plasma TV cost $13,126 in 2014 dollars. Today, you can buy a substantially better 42” flat screen TV for $380 – a price reduction of 97 per cent. However, the very richest have got richer more quickly than the rest.
If our reference point is the whole world, inequality is decreasing. Strictly speaking, declining global income inequality is no news. A number of scholars, including Xavier Sala-i-Martin of Columbia University, Surjit Bhala of the Brookings Institution and Martin Wolf of the Financial Times, identified a declining trend in income inequality over a decade ago. However, there is so much talk about apparently increasing inequality that the issue deserves further attention.
Recent work by Paulo Liberati of Roma Tre University confirmed the trend of falling inequality. Even Angus Deaton of Princeton University, who is generally sceptical about international income data, acknowledges that global inequality is “probably” declining. “We are witnessing,” as Branko Milanovic of the World Bank wrote, “the first decline in global inequality between world citizens since the Industrial Revolution.”
To understand the rise and fall of global inequality, it is important to remember that, for most of human history, incomes were more equal, but terribly low, throughout the world. At the time of Caesar Augustus, incomes in the most advanced parts of the world ranged between what would now be $1,100 and $1,400 per person per year. Progress was painfully slow. As late as 1820, average global income was still about $1,300.
That said, by the early 19th century, a pronounced income gap emerged between the West and the rest and this grew over time. For example, take the United States. In 1820, the US was 1.9 times richer than the global average. By 1960, it was 4.1 times richer and, by 1999, 4.8 times richer. By 2010, the US was only 3.9 times richer. During this period, some countries did very well and developed and others did not. The lack of development of many countries and the level of inequality in the world as a whole became an important political issue in the 1960s and 1970s, especially amongst Marxist and socialist development economists whose views formed the consensus. But, it was not this kind of development economics that has led to global inequality falling.
The narrowing of the income gap between the West and the rest is also not a function of declining Western incomes. Due to the Great Recession, to give one example, US GDP per capita decreased by 4.8 per cent between 2007 and 2009. It rebounded by 5.7 per cent over the next four years and stands at an all-time high today.
Rather, the narrowing of the income gap is a result of growing incomes in the rest of the world. This period of rapid growth of incomes in many non-Western countries is consistent with the period of globalisation that started with economic liberalisation in the 1980s.
Consider the spectacular rise of Asia. In 1960, the US was 11 times richer than Asia. Today, the US is only 4.8 times richer than Asia.
China is, of course, the most important Asian success story. Between 1958 and 1961, Mao Zedong attempted to transform China’s largely agricultural economy into an industrial one through the “Great Leap Forward.” His stated goal was to overtake the US’s industrial production in 15 years. Industrialisation, which included the building of factories at home as well as large-scale purchases of machinery abroad, was to be paid for by food produced on collective farms.
But the collectivisation of agriculture resulted in famine that killed between 18 and 45 million people. Industrial initiatives, such as Mao’s attempt to hugely increase production of steel, were equally disastrous. People burned their houses to stoke the fires of the steel mills and melted cooking wares to fulfil the steel production quotas. The result was destruction, rather than creation of wealth.
Deng Xiaoping, Mao’s successor, partially privatised the farmland and allowed farmers to sell their produce. Trade liberalisation ensured that Chinese industrial output would no longer be dictated by production quotas, but by the demands of the international economy. Since liberalisation in 1978, China’s GDP per capita has increased 12.5 fold, rising from $545 in 1980 to $6,807 in 2013. Over the same time period, the Chinese poverty rate fell from 84 per cent to 10 per cent.
What is true of China is also true in much of the developing world. As Laurence Chandy and Geoffrey Gertz of the Brookings Institution wrote in 2011, “Poverty reduction of this magnitude is unparalleled in history: never before have so many people been lifted out of poverty over such a brief period of time.”
At the heart of the income gap that arose between the West and the rest was the Industrial Revolution in Britain, Europe, and America in the early 1800s. Unfortunately, by the time the benefits of industrialisation were fully understood elsewhere, many countries in Africa and Asia opted for the wrong kind of industrialisation – one that was based on deeply inefficient Soviet-styled central planning, rather than a free market. In recent decades, most of those countries, abandoned state-driven route to economic development and grew. This reduction in poverty has led to the shrinking of global inequality.
The shrinking income gap between the West and the rest masks even greater advancements that developing countries have made in other areas. Take life expectancy: between 1960 and 2010, global life expectancy increased from 53 years to 70, while in the US over the same period it rose from 70 to 78.
Put differently, the life expectancy gap shrunk at a faster pace than the income gap. Similar stories can be told about child and maternal mortality, treatment of communicable diseases, the spread of technology, and so on. Human progress is not only marching forward; it is also becoming cheaper.
Clearly, technological advances made by the West (for example, transport, medicine and communications) raised standards of living in the rest of the world. The shrinking gap in the standards of living is arguably more significant than the shrinking income gap. As the Nobel prize-winning economist Friedrich Hayek noted, “The benefits of freedom are… not confined to the free... There can be no doubt that in history unfree majorities have benefited from the existence of free minorities and that today unfree societies benefit from what they obtain and learn from free societies.”
The narrowing of the gap between the West and the rest could stop or be reversed by war, trade protectionism or onerous caps on energy use in poor countries. Looking into the uncertain future, let us hope more of our leaders realise the benefits of technological innovation, entrepreneurship, free trade and peace. It is something of an irony that the same people who lamented the extreme poverty in many parts of the world in the 1970s, and who proposed misguided solutions, now talk about the problem of “increasing inequality”. Inequality is increasing in many individual countries but not in the world as a whole. Why have they shifted their focus from the international to the national stage? If their focus were still international, and on the position of the world’s poor, they would have to admit that huge strides have been made.