Thursday, September 21, 2006

Inequality Trends

In my ec 10 lecture yesterday, I said that while income inequality has increased in the United States over the past several decades, it has decreased in the world as a whole. A student in the class emails me a good question about this claim:

Professor Mankiw

With all due respect, I cannot find peace with your assertion today that the world is becoming 'more equal'. I just read this in one of my other lecture notes: 'Though Africa has historically been poor the difference between it and the restof the world has dramatically increased in the last 200 years. In 1800, per-capita income in the US was possibly 3 times greater than in Africa. Now itis 20 times greater. Compared to the poorest African countries it might be 50 or 60 times greater.'

I would really appreciate some feedback on this matter. Of course I understand how busy you must be so please do not let this be an inconvenience to you.

[name withheld]
South Africa

As the student notes, Africa is indeed lagging behind. The decline in world inequality is driven by the experiences of India and especially China, rapidly growing countries with large numbers of poor people.

Here is an excerpt from a research paper by Columbia University economist Xavier Sala-i-Martin:

All indexes show a reduction in global income inequality between 1980 and 1998. We also find that most global disparities can be accounted for by across-country, not within-country, inequalities. Within-country disparities have increased slightly during the sample period, but not nearly enough to offset the substantial reduction in across-country disparities. The across-country reductions in inequality are driven mainly, but not fully, by the large growth rate of the incomes of the 1.2 billion Chinese citizens.

Unless Africa starts growing in the near future, we project that income inequalities will start rising again. If Africa does not start growing, then China, India, the OECD and the rest of middle-income and rich countries diverge away from it, and global inequality will rise. Thus, the aggregate GDP growth of the African continent should be the priority of anyone concerned with increasing global income inequality.

Here is another paper on the African growth experience. See also page 435 of your textbook, where you will find a box on global inequality (new in the 4th edition).