A while back I reposted Andy Sumner’s blog on new research on inequality from the Chilean economist Gabriel Palma (right). But I’ve now read the paper, catchily titled ‘Homogeneous middles vs. heterogeneous tails, and the end of the ‘Inverted-U’: the share of the rich is what it’s all about’ and am so blown away, that I have to come back for another go – it really is a brilliant piece of work. The Development and Change paper is gated (when is the revolution in academic journal publishing going to hit the development sector – time for DFID and the ESRC to take a lead?), but there’s a longer version on the Cambridge economics website.
Rather than just look at the single number of the Gini index to describe inequality, Palma crunches the numbers on inequality decile by decile (decile 10 is the richest 10% of a country’s population , decile 1 the poorest 10%) and what he finds is extremely important. Namely:
‘There are two opposite forces at work. One is ‘centrifugal’, and leads to an increased diversity in the shares appropriated by the top 10 and bottom 40 per cent. The other is ‘centripetal’, and leads to a growing uniformity in the income-share appropriated by deciles 5 to 9. Therefore, half of the world’s population (the middle and upper-middle classes) have acquired strong ‘property rights’ over half of their respective national incomes; the other half, however, is increasingly up for grabs between the very rich and the poor.
Globalisation is thus creating a distributional scenario in which what really matters is the income-share of the rich — because the rest ‘follows’ (middle classes able to defend their shares, and workers with ever more precarious jobs in ever more ‘flexible’ labour markets). Therefore, anybody attempting to understand the within-nations disparity of inequality should always be reminded of this basic distributional fact following the example of Clinton’s campaign strategist: by sticking a note on their notice-boards saying “It’s the share of the rich, stupid”.
In passing he also points out that there is no evidence at all for a ‘Kuznets curve’ in inequality, which argues that ‘things have to get worse before they get better’, i.e. that countries that want to develop have to accept a period of greater inequality, before they all end up like Sweden.
Looked at in terms of the Gini index, Palma finds a convergence between countries over the last 20 years, with the least unequal countries becoming more unequal (especially former communist bloc economies), while the most unequal (mainly in Latin America) have become slightly more equal (and got a lot of hype and praise for doing so).
But it’s the decile breakdown that is really interesting. The first graph (right – if it’s too small, click and keep clicking ’til it expands) shows the share of deciles 10 and 9 across 135 countries. What it shows is that the real driver of inequality variations within countries is the richest 10% (and probably only the richest fraction of them). Even the next richest 10% basically gets the same chunk of national income across all countries. Palma puts this down to ‘one of the key characteristics of neo-liberal economic reforms: its ‘winner-takes-all’ proclivity.’
But if you add up the income shares of the 50% of the population just below that rich 10% you find that in almost all countries, they receive about half the national income (see graph 2, below). As Palma puts it:
‘A schoolteacher, a junior or mid-level civil servant, a young professional (other than economics graduates working in financial markets), a skilled worker, middle-manager or a taxi driver who owns his or her own car, all tend to earn the same income across the world.’ [when their incomes are ‘normalised’ for the differences in the income per capita, that is].
Thus he finds ‘extraordinary contrast between the distributional-heterogeneity at the top and bottom of the income distribution and the remarkable homogeneity in the middle.’
All this has some intriguing implications, not all of them terribly welcome. For example his analysis: ‘casts doubts on the role that ‘human capital’ is supposed to have on income distribution according to mainstream economics and UN reports. According to this theory, the level of education is a crucial variable (if not the most crucial variable) in the determination of income inequality. However….. if most of the world’s educational diversity (both in terms of quantity and quality) is found among the population in ‘D5–D9’ — e.g. in terms of the share of the population with secondary and (especially) tertiary education — why does one find extraordinary similarity across countries in the shares of national income appropriated by this educationally highly heterogeneous group?’ Oops.
More happily, his analysis also shoots down the ‘aristocracy of labour’ explanation for the uniquely high levels of inequality in Latin America. A favourite argument of the structural adjustment brigade in the 80s and 90s, this argued that ‘excessive’ labour rights and unionisation was keeping poor people out of the skilled labour force and driving up inequality. But Palma concludes ‘what really differentiates Latin America’s inequality is located at the tails of the distribution of income — hardly where skilled workers are located.’
Then he starts to get enjoyably heated, describing the region’s oligarchies as ‘living fossils’ and arguing that
‘Perhaps those following the Washington Consensus should give their ideology a sabbatical and go back to their drawing boards, and start thinking again about why the capitalist élites in Latin America and South Africa are able to appropriate a share of national income that is so much higher than anybody else’s. In particular, so much higher than in other middle-income countries — such as those in North Africa, the former Soviet Union, Eastern Europe, the Caribbean, and the second-tier NICs — where often there are more markets rigidities; where prices, institutions and social capital are less ‘right’; where property-rights are often less well-defined and less well-enforced; where there is often more educational segmentation; where the educational systems for the poor are even more dismal; where there is even greater gender discrimination; even more shortages of skilled labour; where democracy could be described as more ‘low intensity’; where there are more problems of ‘governance’; where success or failure in business depends even more on political connections and corruption, and so on.’
Instead, he puts it all down to politics:
‘In Latin America the middle classes seek to defend their share of income with different forms of alliances with the élite (some more successfully than others). This is different to India, for example, where the administrative classes defend their position mostly via alliances with the poor (which gives them the political power to mediate in the different conflicts between the capitalist élite and the state)’. Vintage stuff.