in Economics

Perspective: Global Wealth Inequality

Imagine showing economic disparity

Don’t squint at this graph too much…we’ll get back to it in a second.

When most middle income Americans think of the poorer neighborhoods in big urban centers in the country, the images that come to mind are quite dire: badly maintained housing projects where folks are stacked on top of each other, people without homes, sub-par food choices in the local markets, and dirty streets. Of course, it all depends on your perspective. When I came to such neighborhoods in NYC after spending the first ten or so years of my life in Mumbai, India, my analysis, was quite distinct. The buildings in even the poorest neighborhoods were built to code and there was hardly anyone who had to sleep on the streets. The super markets were an absolute wonderland – not only were there an order of magnitude more types of things to buy and eat but each category had numerous options. The streets were incredibly clean – hardly any giant piles of trash, smelly uncovered stagnant water drainage ways, and not an unpaved road in sight!

The concept of poverty in this land of wonder just didn’t make sense to me. With time though, I added several other points of reference in addition to a pre-reformed India. After visiting homes in the Upper East Side and suburbia, I started getting it. Moreover, my definition of poverty morphed from a qualitative vision of destitude folks on the street to a more sophisticated one that took into account how much people can participate in society.

Still, a part of me finds it difficult to use the same words to describe the conditions of the most destitude of people in developing countries with the same in developed ones. It is probably due to some of the images from the poorest parts of India and other developing nations that have been burnt in to my head – visions I don’t recall seeing in any part of developed ones. Another reason is that many immigrants I have spoken to who are easily in the bottom decile of income in the USA compare their earning potential, quality of life, and optimism for the future to the old-country and share a similar perspective to the 10 year-old me. Of course, in recent years, all three of these are being eroded. Still.

Which brings me to the graph at the top of this graph which is from a book called The Haves and the Have-Nots by the World Bank economist Branko Milanovic.  I got it from Catherine Rampell’s blog on the NYTimes where she does a great job breaking it down.  Along the x-axis, the country’s population is broken into 20 per-capita income groups called “ventiles” (quintile…decile…ventile) that are adjusted for purchasing power parity.  So, it’s an attempt to fairly compare income groupings across different countries.  The y-axis shows percentile of world-income – so if a point is at the very top, it means that country’s ventile in question is among the richest people in the world.  So, the graph shows that the richest people in the USA and Brazil are amongs the richest people in the world.

Here’s some further analysis from Catherine Rampell:

“Now take a look at America. Notice how the entire line for the United States resides in the top portion of the graph? That’s because the entire country is relatively rich. In fact, America’s bottom ventile is still richer than most of the world: That is, the typical person in the bottom 5 percent of the American income distribution is still richer than 68 percent of the world’s inhabitants.

Now check out the line for India. India’s poorest ventile corresponds with the 4th poorest percentile worldwide. And its richest? The 68th percentile. Yes, that’s right: America’s poorest are, as a group, about as rich as India’s richest.

Kind of blows your mind, right?

Now you might be wondering: How can there be so many people in the world who make less than America’s poorest, many of whom make nothing each year? Remember that were looking at the entire bottom chunk of Americans, some of whom make as much as $6,700; that may be extremely poor by American standards, but that amounts to a relatively good standard of living in India, where about a quarter of the population lives on $1 a day.”

That bears repetition – the richest Indian ventile is as rich as the poorest American ventile. This would suggest in quite stark terms that poverty means drastically different things in different countries. By the way, this is a 2011 book, so the Indian numbers are the numbers with all the growth seen in the past decade and a half.

A quick couple of addendums:

1) One could conclude that if one had to play the genetic lottery, one would be indifferent between being born a poor American and a rich Indian. Qualitatively speaking though, I would have to say, that it’s a no brainer and I would rather be born rich in India. Best left for another post.

2) Looking at the graphs, one could be tempted to think that the flatter a country’s graph, the less inequality there is.  This is misleading because the y-axis is percentile based.

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