The Rich are Getting Richer

What is the issue?

Income inequality between countries has been touted to be reducing, but it has been more gradual than perceived.
But inequality within countries is worsening rapidly and only the elites seem to be benefitting across jurisdictions.

What are the generic inequality trends?

Current income trends reveal that while inequality between countries has gone down little, but inequality within countries has increased greatly.
Yet, on the whole, emergence of countries with large populations like China and India appears to be reducing global inequality due to a middle class boom.
Chart 1 - represents two inequality indicators namely “Gini Co-efficient and Palma ration”, both of which indicate decline in global inequality since 2000.
Notably, “Gini Index” is a measure of the dispersion of income among the population (0 being perfect equality and 1 being maximal inequality)
Palma ratio is the ratio of the share of income of the top 10% of the population to the bottom 40%.

Notably, it is important to differentiate between “income and wealth” – while the former is a flow component, the latter is an accumulation over the years.
Elephant curve - This describes percentage changes in incomes across different deciles of population (10 equi-populous income sorted groups).
While this curve too recorded a strong growth of middle income groups in the global population, there are two important caveats to be taken note of.

What is the problem with the above figures?

Elephant’s curve is based on proportionate increases, which will inherently make increases greater if initial incomes are low and vise-versa.
For example, if the 5^th docile earns $1000 per-capita, a $200 increase would mean 20% raise, while for a higher docile that earn $20,000 per capita, a $200 raise would merely account for 1% increase on the graph.
Hence, if absolute numbers are considered, the middle income bulge disappears and a smooth horizontal hockey stick like progression is noted.
This implies very little growth in incomes across dociles and a drastic spike in the highest income bracket.
Underestimates - The estimated incomes are in terms of Purchasing Power Parity (PPP) exchange rates rather than on market exchange rates (MER).

There are concrete indicators to say that PPP measures overstate the incomes of people in poor countries, and thereby underrate global inequality.
It is to be noted that all international transactions are on MER terms, and the divergence between PPP and MER has significantly grown in recent decades.
There have hence been calls for calculating income inequality on MER terms to get the exact grasp of the income distribution.

What are the global GDP trends across regions?

Chart 2 - provides a look at the evolution of shares of global GDP of the major geographical regions, measured at market exchange rates (for US Dollar).

The results are quite startling, as the concept of emerging markets sounds more like mythical than real.

The apparent decline in the share of North America and the European Union has been quite gradual, and more marked only after 2005.
The only region to show notable increases in share of global GDP since 1960s was “East Asia and pacific” (China, Japan, Korea, Australia & New Zealand).
More strikingly, for other regions, there has been little increase in the global GDP share and they continue to be brushing the horizontal axis.
Given that population growth rates were higher in these regions than elsewhere, the differences in per capita income would have been even greater.

East Asia - Even the greater dynamism of East Asia was largely due to only two countries: first Japan until the late 1980s, and then China recently.
Chart 3 highlights the role of China, whose share increased from less than 3% in 1968 to nearly 15% in 2016, with most of that increase occurring after 2002.

What are the income trends within countries look?

Table 1 shows the share of income increases in the period 1980 to 2016 going to different segments of the population in major countries.

Once again, it was only in China and EU that the middle 40% of the population (below the top 10%) garnered a considerable income increase.
In all other regions, the top decile clearly got away with the lion’s share of income growth, with Russia recording shockingly obscene figures.
In India’s case, the experience was also stark - the top 10% got two-third of income increases, and just the top 1% got a whopping 28% share.
Hence, these trends illustrate that the rich 10% (particularly the top 1%) seem to be benefitting enormously at the cost of the poor across countries.

Source: Business Line