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Global income inequality continues to grow despite some evidence of convergence. Discuss.
In the very long-term divergence between countries must have occurred. Over millennia,
contingencies of geography and climate contributed to differing regional rates of development
(Diamond; 1998). The growth of capitalism, especially in the past 200 years, and increasing
global integration has quickly accentuated these differences, manifested in income
inequalities (Prichett; 1997). While we assume, when posing questions about trends of
inequality, that all ideologies conceive it to be undesirable, the capitalist system relies on the
existence of at least some level of inequality. Many argue however that the staggering extent
of global inequality today is not inevitable, and have suggested that a new phenomenon,
‘globalisation’, has begun to lessen the gulf. Those who remain unconvinced point more
pessimistically to 40 odd years of active developmentalism by states and NGOs, which
according to the data they present, have done little to buck the prevailing trend. We must be
aware of choices made when handling data; we will examine this first, assessing which
empirical evidence is most appropriate. Subsequently, having seen - amid the many
dimensions and contrary movements - that divergence is the more common trend, we will
look at out how this has historically occurred and why it continues today, surveying
theoretical explanations covering a range of factors.
The Myth of Objectivity: Handling Data and Definitions
When a photograph is taken with a camera it is not simply an objective record of reality. The
person behind the mechanism who makes seemingly small decisions critically affects how the
picture ultimately appears. The borders of the picture define the limits of inclusion and
exclusion; the choice of portrait or landscape alters our perspective; the lens selected - wideangle or zoom - affects the level of detail; the exposure time and monochrome or colour
presentation will contribute to our interpretation. Our impressions about ‘fact’ are similarly
determined by the quantity, consistency, and comparability of data and can be “illusory”
(Székely & Hilgert; 1999). There is no agreed basis of definition for the loose concept of
‘income inequality’; thus measurement and presentation relies on normative judgement and it
is vital to remember that different ideological agendas, consciously or otherwise, may inform
choice made. Researchers “tend to choose their variables to produce conclusions they feel
ideologically and politically comfortable with” (Sutcliffe; 2005; p15) so it is vital that data
users are aware of how statistics have been produced. Wade (2004) points out not only the
sensitivity of results to methodology, but also the political sensitivity of results. Any
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conclusions drawn from evidence can be used to prescribe policies, therefore we should only
glean likely trends, and not declare certainties. Having said this, a healthy amount of caution
should not make us tentative to the point of paralysis. Rather, in ‘pursuit of truth’ we must
critically assess as much information as possible. Suffice to say that in terms of sources,
utmost accuracy is clearly desirable, as is the largest possible sample size, and the longest
possible time period. Three of the most critical choices are weighting of countries,
measurement of income and statistical comparative method.
The decision to weight countries by population, or the attempt to measure individuals as
opposed to country average incomes is hugely important. Unweighted measures are not
obsolete, since they can give information about the results of a various countries’ policies trade openness or resource endowment (Wade; 2004). However, the problem of giving as
much weight to say Switzerland as to China is that comparison of GDP per capita lessens the
global gap, because more of the world’s population lives in the ‘developing world’. (Rapley;
2001). With uneweighted measurements, Kenny (2005), for example, found - contrary to
received opinion based on weighted figures, that between 1950-99 GDP was stagnating rather
than diverging. It seems more sensible, when investigating global income inequality, to
weight by population therefore. Measured in PPP inequality is seen to fall after approximately
19801, using this method, the cause of certain globalisation-as-salvation polemics. Wade
however, saliently points out the distorting effect of China’s (and India’s) huge
population(s)2. With the exception of some East Asian NIEs, the former countries might be
called anomalies, since in Latin America, West Asia and Africa the trend is reversed. Exclude
China from the sample and inequality rises sharply from 1980 onwards, and justification for
such an omission and the conclusion (with qualification) of divergence, will be given later, on
the grounds that ‘pro-globalisers’ have misleadingly tried to flaunt China as proof that the
current policies of IFI’s and governments are helping the ‘developing world’ as a whole.
The criticism of this technique is that mean incomes do not take account of distribution.
Because a variety Lorenz curve shapes will give the same Gini coefficient figure, this
common measure hides internal details. The tendency “to fall into conflating rich countries
with rich people” (Kitching; 2001; p189) must be avoided since we are not interested, as
Adam Smith was, in the wealth of nations, but in the welfare of people. The success of China
might simply mean more millionaires, with the socio-economic status of the majority
unchanged; indeed the benefits of growth are being distributed very unevenly (Glyn; 2005).
Despite Cornia’s (2003) estimates that between 60-90% of global inequality is due to inter1
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The consequence of the use of PPP here, by Kenny, and others, will be discussed later.
Together totalling almost 40% of the world population, compared to approx. 10% living in Sub-Saharan Africa
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country differences, and only 10-40% caused by intra-country distribution, knowledge of the
latter can yield a more penetrating picture, potentially transforming the patterns found. Some
studies incorporating within-country inequality have assumed a log-normal distribution,
created synthetic statistics based Gini or Theil indices but Milanovic has instead directly
utilised household income and expenditure surveys. There are serious problems with such
studies. The longer the recall period the more income is underestimated (Wade; 2004) and
some studies lacked sufficient coverage to represent the rich, or suffered from problems of
seasonality (Székely & Hilgert; 1999). Extremely expensive and time-consuming, they are
collected very infrequently. So although Milanovic’s data was from 88 countries, representing
94% of the world’s gross output and 84% of its population, its time period of 1988-93 was
severely limited. The sharp increase of global inequality of individual incomes he finds (0.628
rising to 0.670) therefore may only be ‘noise’. Nor do surveys do not follow a standard
international template. Yet, precisely because of the disturbing conclusion of rising
inequality, dismissing outright such techniques would be folly. Though more data of higher
quality is needed, it is the only method to capture the growing urban-rural divide in India and
China, in principle it is likely to be most “authoritative” (Sutcliffe; 2005).
A final choice of great significance how to measure income. It may seem purely a technical
issue but it hugely alters world view: the ratio of USA income to China is 34:1 in exchange
rates, only 8:1 in PPP (Sutcliffe; 2005). GDP per capita by current exchange rates to the
dollar was for a long time standard. The concept of Purchasing Power Parity has recently
become popular, proponents arguing it is most pertinent to welfare because of local price
structures. Also, Rapley (2001) and Jones (1997) point out that developing countries have
large informal economies, implying that GDP per capita will underestimate actual incomes.
Jones rightly reasons that calculating GDP per worker instead can solve this issue, since
salaries must be similar to those of unregistered workers.3 In reply to the first argument,
adjusting for PPP may well be instrumental when looking at welfare of very poorest in each
country, in order to calculate for instance who is most in need of aid. But market exchange
rates are not irrelevant to welfare, and certainly not to global inequality. No country exists in
a vacuum. Using PPP implies a closed economy and a static population; Wade’s arguments
against it are compelling. He cites the need to import capital goods (vital for economic
development and long term growth prospects), the attractiveness and value of FDI inflows
(explored later), and diplomatic participation in international organisations.4 He scathingly
illustrates the point: “International leaders have not been lining up to accept repayment of
developing country debts in PPP dollars” (Wade; 2004; p576) and he is right to assert that
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Since if wages in the formal sector were higher competition for jobs would drive them down and vice versa.
World Bank voting quotas for instance are largely dependent on Fund quotas (Wade; 2004)
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such international dealings feed back into the capacity of the domestic economy and hence
citizen’s welfare. I would add that if the logic for PPP is relativity we must apply it
internationally too. Migration to richer countries will be an attractive option to many in poor
countries, even those who can live decently at home, because remittances will certainly be
higher still. The resulting ‘brain drain’ of developing countries is very relevant to human
capital factors in divergence theories. On balance then, we should reject the PPP measure, and
with it any real possibility of arguing for convergence. As a country grows richer its
corresponding price structure will rise thus PPP does not really measure convergence. In
terms of international comparison is merely a misleading - possible agenda-driven – tool,
which, like HDI tries to lessen the perceived extent of inequality.
Statistical comparison is the last critical choice. Using an integral measure of distribution
such as the Gini coefficient takes into account the entire population which a ratio of extremes
(except the ‘Robin Hood ratio’ 50:50) would not. However ratio or percentile estimates may
be, Sutcliffe argues, the best indicators of social justice. His ratios illuminate a startling trend.
Although the incomes of the top 50% against the bottom 50% has decreased, after 2000 the
20/20 and 10/10 gaps began to rise, the 5/5 divide started rising after 1990 the highest earning
1% of the world have been pulling away from the lowest earning 1% since 1980. Jones (1997)
charts data from the Penn World Tables on a graph showing the density of GDP per worker
relative to the USA in 121 unweighted countries in 1960 and 1988. Not only has the income
distribution widened in the 28 year period, reflecting the polarisation of very rich and very
poor, but bimodal ‘twin peaks’ have emerged a characteristic which encapsulates divergence
between ‘developed’ and ‘developing’ world. Even if we were to accept convergence
evidence (measured inter-country only, with PPP), this polarising tendency, would be a clear
contradiction, belying suggestion of a single compressing trend, and sweeping generalisation
of an equalising world.
What’s Going On? Factors Behind Divergence
If we are to assert that global income inequality is growing we must have a conceptual
foundation to complement the empirical evidence. Milanovic (2003) speaks of the “perils of a
monocausal approach” (p.676) and we will try to avoid the umbrella term ‘globalisation’
which incorporates a plethora of interlinking factors that have had varying degrees of
importance at different times in history. We limit examination to four features of global
capitalism most actively driving divergence between and within countries: industrialisation
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and trade; concentration of capital flows; technological innovation; and the growing
international division of labour.
In the 19th century, following Kaldor’s law, Bairoch and Kozul-Wright (1996) believe
industrialisation was the pre-eminent engine of growth, and by proxy divergence of incomes.
It is no coincidence that the majority of today’s ‘developing world’ is made up of former
colonies, and the ‘developed world’ former colonisers. Imperial powers prevented their
territories from industrialisation (Milanovic; 2003), British hegemony in manufacture was
unmatched and overall it was “an essentially pre-industrial world” (Bairoch & Kozul-Wright;
2006; p14). In such a world, the terms of trade for primary commodities were relatively
favourable, and so leading agricultural countries could reap rewards by exporting raw
materials. The Ricardian principle of comparative advantage was felt to be widely applicable.
It has since been pointed out that it may only function within a certain ‘cone of
diversification’ in which success depends to the decision of third parties to enter the market
for a given specialisation with an even more advantageous position (Cornia; 2003). While
industry, the much more dynamic sector was least ‘globalised’, big primary exporters found it
difficult to sustain trade and growth in what was a much more limited sector of production.
History shows that those who consolidated an industrial base are today rich; countries like
Argentina, once a rich primary exporter, declined because of their dependency on primary
products, lack of diversity and vulnerability to price shocks.5 Milanovic maligns the practice
of omitting the glorified pillaging practices of the East India ‘trading’ Company and from
accounts of divergence at this time simply because the analytical tools of economists are not
equipped to treat conquests and plunder” (p.669). Even more vital, the transatlantic slave
trade meant that essentially cost free labour poured profits into the empire. Though Milanovic
explicitly disagrees with A. G. Frank’s uncompromisingly dualistic approach, his dichotomy
of the ‘two faces’ of globalisation has much in common with the idiom of dependency
theorists. Kitching has argued that “essentially bipolar exploitation theories are no longer
adequate to explain the workings of global capitalism” (2001; p189). Do the rise of the East
Asian NIEs render such ideas obsolete? Geographical region is no longer an easy delineator
of ‘core’ and a ‘periphery’, true. But complexity does not necessarily mean ambiguity. There
is an international capitalist class emerging, but trading rules remain today “slanted in favour
of those who wield power” (Milanovic; 2003; p679). Not as blatant as the colonial contracts6
of the previous era, preferential terms of trade include differential treatment of subsidies
(favouring, for instance, cotton farmers in the USA) The WTO which upholds these rules has
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The exception here is the USA, which may differ due to later migration inflows amongst other factors.
Which involved enforced low tariffs and the sole permission to import from the ruling country, as well as a ban
on exports.
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been vehemently criticised by developing countries for exacerbating the inequality of the
world
Over 25 years China’s share of manufactured exports in the world has increase from 0.8 to
7.3 in 2003 (Glyn; 2005), a dominance which threatened other low-wage consumer goods
producers like Taiwan. To the developed countries, however, manufacturing is no longer as
important. Since it cannot be internationalised, service is essentially immune from much
competition, and is therefore both profitable and relatively low-risk service. Especially large
service providers, consolidated by M&As, receive a high proportion of FDI (Glyn; 2005) and
this hints at the fast that the majority of investment remains in the rich world. The principle
“wealth attracts wealth” (Rapley; 2001; p302) is consonant with trends of polarisation
observed but such concentration of capital flows may be seen as market imperfection. To
some extent a new institutionalist argument may explain the problem, for instance the absence
of anti-monopoly legislation (Cornia; 2003). This is most relevant when a country does garner
investment but it is very unevenly distributed, such as is happening in China today. The
related issue of ‘tax competition’ sees governments slash corporate taxes in attempting to
attract FDI, resulting in the middle and lower classes bearing a greater tax burden, increasing
income inequalities (Glyn 2006). Neoliberal convergence theories crucially neglect demandside factors and the notion of ‘conditional convergence’ which posits conditions as
prerequisite may be more appropriate (Rapley; 2001). One such factor is the presence of
needed to attract investment. The catch-22 is that investment is needed to produce human
capital, and due to structural adjustment and fiscal austerity government’s ability to invest is
low. This may explain why liberalisation has not seen an influx of investment into the third
world. It is due to the large demand in China’s population, that it has attracted investment, not
only to supply-side factors such as low production costs. Most capital created is reinvested
back in to rich countries, indeed of all US investments in 1999 only 1% went to the third
world (Rapley; 2001). Liberalisation has meant also, that when countries do manage to attract
FDI, it can leave again as quickly as it arrived, exemplified by the 1997 Asian crisis.
The ability to generate and absorb new technologies is a significant determinant of economic
growth and thus average incomes. Two central capitalist processes of investment and
innovation are said to be “neither abstract nor spontaneous” (Bairoch and Kozul-Wright;
1996; p26). In practice, this means that again, levels of development will usually be
reinforcing. The state’s role in facilitating accumulation, and investment in R&D is
epitomised by the OECD countries but China’s growth could also be attributed to a ratio of
investment to GDP of about one third between 1978-94 (Glyn; 2005, quoting Maddison).
Endogenous growth theory may overestimate the importance of technological progress, and
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its inward focus contrasts with theories of dispersion propounded by globalisation apologists.
Kenny (2005) may be right to argue for its past role in technology transfer between nations
but Jones (1997) is simplistic in assuming that all countries will eventually share ideas (and
therefore incomes cannot get infinitely far apart, but will ultimately all proceed at the average
rate of growth of world knowledge). There is a considerable lag in diffusion which makes
development very uneven, due to the search for profit. Cornia speaks of “the creation of a
standardized patent regime” and Trade Related Property Rights, upheld by the WTO are an
important example. This may be the one area in which regulation has grown, and the new
technologies which rich countries continue to develop and gain most from imply that they
will maintain higher growth rates than poor countries promoting further divergence.
The international division of labour is partly a result of the international production chains of
TNCs, and of skill-biased technical progress. The changes within labour markets are of
significance to global income distribution. The well known shift toward skilled labour is
related to human capital, and is another instance of a self-perpetuating inequality – increasing
returns to education can lead to better jobs and education within families for generations to
come especially in less egalitarian countries with low social mobility. The 18% of the OECD
population employed in manufacture, despite benefiting as consumer from cheap imports,
may face higher risk of unemployment as production shifts to cheaper locations like China
(Glyn; 2005). As such, international trends are hurting the poorer sections of society within
the richer countries. UNIDO’s data, cited by Wade shows a stable or declining inequality of
wages from the early 60s but a sharp increase in the last few decades with the turning point
around 1980-82. This coincides with the onset of neoliberal reforms, including privatisation,
liberalisation and deregulation. These have weakened unions and increased wage
differentials, for example by removing constraints on executive pay, making wages at the
bottom more ‘flexible’7, and relaxing employment laws facilitating hiring and firing (Glyn
2006). Another result these measures have contributed to increasing profits especially to
economies of scope and scale, rising importance of property incomes and of dividends for
shareholders. The results of ‘long-term’ focused IMF reforms have been, in the short-term,
unemployment which in countries without welfare states is even more painful.
The rise of neoliberalism came about, some have suggested, from a misinterpretation of
economic history. Cramer (2001) speaks of the “common trap…of conflating statistical
association with actual causality” and Wade interrogates in the language of World Bank
reports the fallacious underlying assumptions: the equation ‘liberalisation = trade = growth’.
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Causing minimum wages as a ration to the average to fall in many countries (Cornia; 2003)
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“Convergence of economic policy towards ‘openness’…has gone with divergence of
economic performance” (Wade; 2004; p579) and this is because the relationship may be vice
versa – trade resulting from growth, just as investment seems to follow rather than trigger
growth patterns. The role of the state in economic growth has been ignored, particularly
China’s long protectionist period of ISI, and so use of China as evidence for income
convergence is flawed. Most other countries are forced to work within a free-market model
(apart from notable and hypocritical OECD protection tendencies). There is a dearth of
evidence suggesting success of this system in promoting pro-poor country growth and global
convergence and so we should discount China.8 Within countries too, the Kuznet’s curve
theory provides little axiomatic evidence of converge between rich and poor incomes. What is
clear is that ‘financialisation’ makes the future more unstable and uncertain and this will be
volatility most dangerous for the poor. It is certain that absolute income gaps are rising and
will continue to do so for several generations at least. Interestingly, it seems quite realistic to
say that the middle classes everywhere receive a fairly constant share and transfers and
polarisation at the top and bottom are most likely. Instead of summarising, we can
disaggregate and draw specific conclusions, distinguishing between China, the NIEs and the
rest. Overall inequalities of income are not only self-perpetuating, but are being reinforced by
policy.
Looking to the future, we agree with Sutcliffe about the need to resurrect inequality above the
dominant anti-poverty discourse, and with Rapley who mentions the - rarely spoken of –
possibility of decreased consumption in the West. This might make convergence more likely,
since we should question the attainability of Western levels of income for the entire globe, on
environmental sustainability grounds. It is unlikely to happen however, given that this must
be combined with sustained preference for the South
(Wade; 2004). Kenny mentions
‘diseases of the rich’ killing almost as many as ‘diseases of the poor’ yet exemplifies the
attitude of having-and-eating-the-cake dismissing talk of calculating and providing the money
needed to meet the MDGs. We might also pause to wonder at what point in time countries
became so unequal, it became more palatable to judge them using different scales with PPP.
Can tricks of perception like this, and Hirschman’s so-called ‘tunnel-effect’ quash the
discontent generated by continuing income inequality on a vast scale? Or will the ‘Hello
effect’ accentuate the sensation of poverty and inequity among the poor, leading to global
political instability?
Despite its great potential due to a 300million+ ‘reserve army of labour’, its recent growth may have been overexaggerated (Wade; 2004) and its rapid convergence therefore short-lived.
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
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
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