August 26, 2015

People in Poor Countries will still catch up and reduce world income inequality in 2035

Over the next two decades the structure of world population and income will undergo profound changes. Global income inequality is projected to decline further in 2035, largely owing to rapid economic growth in the emerging-market economies. The potential pool of consumers worldwide will expand significantly, with the largest net gains in the developing and emerging-market economies. The number of people earning between US$1,144 and US$3,252 per year in 2013 prices in purchasing power parity terms will increase by around 500 million, with the largest gains in Sub-Saharan Africa and India; those earning between US$3,252 and US$8,874 per year in 2013 prices will increase by almost 1 billion, with the largest gains in India and Sub-Saharan Africa; and those earning more than US$8,874 per year will increase by 1.2 billion, with the largest gains in China and the advanced economies.

In the baseline projections, the Gini coefficient for worldwide income distribution is expected to decline from 65 in 2013 to 61 in 2035. By comparison, it was 69 in 2003 and at similar values in the late 1980s. While individual income at the 90th percentile in the global distribution was 31 times that at the 10th percentile in 2013, this ratio is projected to fall to 24 in 2035. The projected improvement stems primarily from faster economic growth in the developing and emerging-market economies than in the advanced economies.

* Under an alternative “reversion to mean” scenario in which countries’ economic growth rates are projected to revert gradually toward the worldwide sample mean, inequality declines more slowly, to a Gini coefficient of 64 in 2035.

* Under an “optimistic scenario” for India and China in which both economies maintain rapid growth (assumed at 7 percent annually) for the next two decades through sound economic policies and reforms, the global Gini coefficient would fall to 63 in 2035

Average per capita GDP growth in 2013–35 is projected to be higher for the developing and emerging economies (3.8 percent annually)—not only China and India (4.4 and 4.8 percent, respectively) but also Sub-Saharan Africa (3.5 percent)—than for the advanced economies (1.8 percent). Considering total
GDP, Sub-Saharan Africa and India are projected to experience the highest growth rates (6.0 percent and 5.7 percent, respectively), combining rapid growth in both population and per capita incomes.

Although China’s growth is projected to remain among the fastest in per capita terms, it will no longer be the most rapid in overall GDP terms, owing to a relatively low population growth rate.

Using household survey data and an exhaustive set of projections for the growth of output and population, we have shown that worldwide income inequality is expected to continue to decline over the next two decades. Consistent with economic growth and its distribution across countries and individuals, hundreds of millions of people will be lifted out of abject poverty, hundreds of millions (with the largest net gain occurring in Sub-Saharan Africa) will join the “working poor” class that can afford basic consumer goods, hundreds of millions (with the largest gain in India) will start using consumer durables such as refrigerators and cars, and hundreds of millions (with the largest gain in China) will reach consumption in absolute levels (at constant prices) that we currently associate with median incomes in the advanced economies. These developments will bring business opportunities but also pressures on the environment and challenges for policymakers, both domestically (such as the need for infrastructure) and worldwide (such as climate change)

The decline in global inequality will be less marked if the pace of economic growth slows in emerging markets and converges on the worldwide mean. But successful economic reforms and resulting growth in a few large low-income economies, particularly India, could generate meaningful reductions in global inequality. Rapid growth in China, while beneficial for the country’s large population and the world economy, would no longer reduce global income inequality because the median income for Chinese residents has already overtaken the worldwide median.

SOURCE - Tomas Hellebrandt, Peterson Institute for International Economics and Paolo Mauro, Peterson Institute for International Economics working paper - The Future of Worldwide Income Distribution

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