Term Paper: Income Distribution Gap the Global

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[. . .] N. Report," 2008). Sharp increases were seen in the period between1982 and 1994, which indicates that the income inequality across countries was increasing. Milanovic (2009) attributed this increase in cross-country income inequality to three factors: (1) Declining in the relative incomes of countries in Latin America during the 1980s; (2) declining relative income in the 1980s and early 1990s in the former Soviet Union and in the transition countries of Eastern Europe; and (3) the disastrous performance of a number of African countries. Income inequality dipped for a time after 2000 because economic growth in African countries, Eastern Europe, Latin America, and former Soviet countries increased ("U.N. Report," 2008). Regardless of that post-2000 decline in income inequality, by 2010 the Gini index was still elevated compared to1970s and 1980s levels. The current high Gini index signals increased income inequality that is attributed to two primary factors: institutional forces and market forces.

Population size can be accommodated in the world Gini index such that countries are weighted by their population size with large population nations having a greater influence on the Gini index than do small population nations. The weighted world Gini index shows a steady decline from the year 1962 forward. This decline in income inequality is due to the steep rise in economic growth of China and India compared to nations that are richer. Over one-third of the world's population resides in China and India. As a result the impact that these two countries have on the population-weighted Gini is substantive. Recalculating the Gini index while accounting for the national populations results in markedly different trajectory of the trend line. The population-weighted Gini index shows an upward trend after 1982 -- so, too, does the unweighted Gini index. This signals an overall increase in income inequality across the globe.

One line of thinking promotes a theory based on market forces with strong influence over national income include increased internationalization of companies and "skill-based technical change (SBTC)" that are believed to have brought about greater demand for highly skilled workers. Other researchers propose different reasons for the increase in global income inequality. Card and DiNardo (2002) assert that "contrary to the impression conveyed by most of the recent literature, the SBTC hypothesis falls short as a unicausal explanation" ("U.N. Report," 2008). Economist Paul Krugman and other scholars argue that income inequality is attributable to institutional forces. Examples of institutional forces include deregulation, declines in organized labor numbers and associated declines in unionized pay rates and benefits, stagnating minimum wage rates, and national policies that are advantageous to the wealthy. Milanovic believes that government should not dissemble at the prospect of intervening with the market. Rather he asserts that issues related to global income inequality cannot "be taken out of the social arena by evoking 'the market'…The market economy is a social construct, created, or rather discovered, to serve people, and thus raising questions about the way it functions is fully legitimate in every democratic society" ("U.N. Report," 2008).

Milanovic (2011) provided a robust history of inequality that dates back to the time of the Romans. He wrote that the Goths defeated the richer Romans, but those struggles did not reflect the scope of absolute differences that exist between companies today (Milanovic, 2011). Milanovic argued that the Big Bang of income inequality was precipitated by the industrial revolution.

At first countries' incomes were all bunched together, but with the Industrial Revolution the differences exploded, and the countries have "flown" further apart from each other. . . [it] pushed some countries forward onto the path to higher incomes while others stayed at the point where they had been for millennia. . . . Global inequality has been rising, first quickly, then more slowly, but nearly uninterrupted since the Industrial Revolution (Milanovic, 2011: xii).


In 1990, China's average income per capita was 46 times less than the average per capita income of the richest nation in the world ("U.N. Report," 2008). By 2010, China's average per capita income had increased so much that the richest nation in the world had an average per capita income that was only 10 times more than that of China ("U.N. Report," 2008). The change has been so dramatic that China moved from one of the major World Bank categories to another -- from being classified as a lower-income country to being re-classified as an upper-middle income nation ("U.N. Report," 2008). As China has moved upward in the rank ordering of countries by average per capita income, within China, income inequality rose ("U.N. Report," 2008). As a country moves from being fundamentally an agricultural society into a more industrialized one, the differential between individual incomes is initially very large. But as the society matures, governmental efforts to assist with wealth redistribution through the traditional forms of tax and transfer systems, and by funding public education, the income inequality declines. Visually, this economic development follows an upside-down U-shaped curve, such that incomes in the agrarian society is low, but is brought upward as industrialization takes hold, and then an advancing society tends to smooth the income inequality differential, bringing about a corresponding drop -- the other side of the U. In the graph. It is good to note that other factors also influence income inequity. For example, the efficiency with which a country's financial sector functions, the degree of openness to trade that characterizes a county's economy, and the willingness of a country's government to intervene in the market all have potential and substantive impact on the country's income inequity.

China has assumed a position of large-scale industrialization that has exacerbated its rising income inequality ("U.N. Report," 2008). Scholars suggest that the key variables influencing income inequality in China are fundamentally represented by the income disparity between traditional workers and the inhabitants of urban industrial areas of China ("U.N. Report," 2008). As a growing number of rural Chinese move to cities, the ratio of rural people to urban people is changing -- increasing from 1.8 in 1983 to 3.3 in 2997. There is a corresponding income disparity between the traditional workers from rural areas and the industrial workers from urban areas ("U.N. Report," 2008). The increased urbanization and industrialization is expected to bring about a rise in the national Gini index. Moreover, the Gini index between urban and rural areas in China is expected to show an initial rise and then a decline, roughly following the contours of the U-shaped curve.


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Card D. And DiNardo JE (2002). Skill biased technological change and rising wage inequality: Some problems and puzzles. Journal of Labor Economics, 20(4), 735.

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Milanovic, B (2005) Worlds apart: Measuring international and global inequality, 180 -- 81. Princeton, NJ: Princeton University Press.

Milanovic B (2009) Global inequality recalculated: The effect of New 2005 PPP Estimates on Global Inequality. Washington DC: World Bank.

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____. (2008, October 16) Income gap between rich and poor is huge and growing, warns UN report. UN News Centre. Retreived http://www.un.org/apps/news/story.asp?NewsID=28590&Cr=INCOME&Cr1=ILO#.UNPIMLYVx-l

____. (2012) World income inequality: Is the world becoming more unequal? Conference Board of Canada. Retrieved http://www.conferenceboard.ca/hcp/hot-topics/worldinequality.aspx

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