Global inequality dropping

Noah Smith writes:

Tomas Hellbrandt of the Bank of England and Paolo Mauro of the International Monetary Fund show in a new working paper that global inequality is falling, as poor countries power ahead. The global Gini coefficient – a standard measure of income inequality – is falling fast. In 2003 the coefficient was 69 (with 0 being perfect equality and 100 being perfect inequality). In 2013 it was down to 65. If current trends continue, it is on course to reach 61 by 2035.

So inequality may be increasing within some countries, but over humanity as a whole, the gap between rich and poor is closing.

The reason for this is what free trade and capitalism have done to countries like China and India, with hundreds of millions rising out of poverty.

So around the world, a rising tide is lifting all boats, and it’s lifting the boats at the bottom faster than the boats at the top. This is really an extremely good, successful outcome (though it would have been nice to see this happen without the increase in inequality within some countries).

A nice break from the gloom and doom.

It’s important to realise is that this is a recent phenomenon. For a long time, the opposite was happening. In 1988, for example, economic historian Brad DeLong showed that the poor countries of the world had mostly failed to catch up to the rich countries since 1870. The former colonial powers of Western Europe, the US and Japan were zooming ahead, with the former colonies either being left in the dust or struggling just to keep pace.

So we may be seeing something like a global Kuznets Curve. In the early stages of global growth, rich countries – and the rich people in them – zoom ahead of the pack, but eventually the masses catch up. If the forces that move inequality really are global in nature, then it means that capitalism and trade really are a force for good. It means that we don’t really face a tradeoff between wealth and inequality in the long run. And it implies that once the poor countries have done some more catching up, inequality will begin to fall within countries, too.

The new data, and the global Kuznets narrative, also destroy the idea that the wealth of rich countries is based on the exploitation of poor countries. Capitalism is not colonialism after all. Most of our global wealth is created by trade and industriousness, not plundered or extracted by force. The world isn’t a zero-sum game.

That is the most vital thing to remember.