World Income Distribution Research Articles

Macroeconomic Effects of COVID-19 Across the World Income Distribution

The macroeconomic effects of the COVID-19 pandemic were most severe for emerging market economies, representing the middle of the world income distribution. This paper provides a quantitative economic theory for why emerging markets fared worse, on average, relative to advanced economies and low-income countries. To do so we adapt a workhorse incomplete-markets macro model to include epidemiological dynamics alongside key economic and demographic characteristics that distinguish countries of different income levels. We focus in particular on differences in lockdown stringency, public insurance programs, age distributions, healthcare capacity, and the sectoral composition of employment. The calibrated model correctly predicts the larger output losses and greater fatalities in emerging market economies, matching the data. Quantitatively, emerging markets fared especially poorly due to their high employment share in occupations requiring social interactions and their low level of pubic transfers, which leads economically vulnerable households to continue working in the market rather than sheltering at home. Low-income countries fared relatively better due mainly to their younger populations, whom are less susceptible to disease, and larger agricultural sectors, which require fewer social interactions.

Composition and sensitivity of residential energy consumption

AbstractWe examine how the composition of residential energy consumption and its sensitivity with respect to income changes. The paper characterizes the energy transition, analyzing the behavior of income elasticity of energy demand along the economic development stages by fuel types. The results indicate a nonlinear relationship between income and domestic energy consumption that can be explained by two factors. First, along the income distribution, consumption of modern fuels increases, replacing traditional and transitional fuels until modern fuels drive all of the growth in domestic energy demand. Second, at the highest income levels, income elasticity starts to decrease, leading to concavity in energy consumption. That is, the income elasticity of residential energy demand follows an inverse U-shape along the world income distribution. This finding suggests that at high income levels, residential energy consumption shows satiation and net energy-saving effects.

Global locational inequality: Assessing unequal exchange effects

Growth in international trade between countries at different levels of development is one of the main drivers of economic globalization. This phenomenon relates to the new international division of labour in which an Emerging Periphery, hosting the offshoring and outsourcing of world manufacturing, stands between a developed Center and a still backward, Poor Periphery. Following the analysis of the relative and absolute indices of global locational inequality, the effect of the unequal exchange on world income distribution in the last 25 years is investigated. A new methodology based on real currency misalignments and value-added trade is presented, which accounts also for international value transfers within global value chains. The counterfactual test shows that trade value transfers represent a significant source of revenue for the Center diverted from the Peripheries. Unequal exchange widens the opportunity gap between citizens of rich and poor countries through an increase in global locational inequality. Redefining post-pandemic international economic rules should therefore recognize the effect of unequal exchange on global inequality.

Global Income Inequality, 1820–2020: the Persistence and Mutation of Extreme Inequality

AbstractIn this paper, we mobilize newly available historical series from the World Inequality Database to construct world income distribution estimates from 1820 to 2020. We find that the level of global income inequality has always been very large, reflecting the persistence of a highly hierarchical world economic system. Global inequality increased between 1820 and 1910, in the context of the rise of Western dominance and colonial empires, and then stabilized at a very high level between 1910 and 2020. Between 1820 and 1910, both between-countries and within-countries inequality were increasing. In contrast, these two components of global inequality have moved separately between 1910 and 2020: Within-countries inequality dropped in 1910–1980 (while between-countries inequality kept increasing) but rose in 1980–2020 (while between-countries inequality started to decline). As a consequence of these contradictory and compensating evolutions, early 21st century neo-colonial capitalism involves similar levels of inequality as early 20th century colonial capitalism, though it is based on a different set of rules and institutions. We also discuss how alternative rules such as fiscal revenue sharing could lead to a significant drop in global inequality. (JEL: N30, O10, O40)

Multinational firms and human capital investment: A dynamic knowledge‐capital model

AbstractTo capture the mixed picture of trade‐induced human capital investment in both developing and developed countries, this paper develops a dynamic general equilibrium model with multinational enterprises (MNEs) and endogenous education investment decision and investigates the impacts of trade cost reduction on human capital accumulation and wage inequality. Illustrated with a numerical example, we show that with endogenous endowment structure, the set of active firm types is mutually determined by trade cost and the discrepancy in the incentives for education attainment between countries. In addition, the exact impacts of trade are determined by changes in the production patterns of firms. When the reduction in trade cost expands the scale of vertical MNEs with headquarters in developed countries, education investment increases in both developing and developed countries. We also show that the distributional impacts of production offshoring are mitigated by human capital accumulation. The conclusions in this paper highlight the importance of education policies in complementing trade policies, as well as the important role of MNEs in shaping the world income and endowments distribution.

Convergence and Innovation in Export Quality and the World Income Distribution

Previous research has documented a strong correlation between countries’ income levels and the quality of their export goods. Given the evidence of fast unconditional convergence in export quality, this raises the question how to reconcile these stylized facts with a stable world income distribution. This paper is the first to document why cross-country export quality convergence within products does not entail aggregate export quality convergence across countries. In fact, the latter is absent because the country-product-specific residual after accounting for export quality convergence is biased in favor of high-income countries’ exports. To document this pattern of export quality dynamics and assess its aggregate implications, we construct bilateral export quality estimates for 122 countries and 2,700 manufacturing goods. Furthermore, we show that the key explanation for this country-product-specific ‘quality innovation residual’ is the fact that high-income countries are more capital abundant and financially developed and export goods that are better aligned to their human capital endowments, all of which are correlated with export quality innovation.

GROWTH AND CONVERGENCE THROUGH TECHNOLOGICAL INTERDEPENDENCE

This paper presents a multi-country version of the Ramsey growth model with cross-country technological interdependence. The results rationalize several stylized facts about growth and convergence. First, individual countries tend to converge toward country-specific balanced growth paths rather than steady-state equilibria. Second, an economy that accounts for a smaller share of the world technology distribution harnesses the “advantages of backwardness” to catch up at a faster speed. Third, countries grow at different rates during the phase of transitional dynamics. However, technological interdependence creates a force toward cross-country convergence in the growth rate and stability of world income distribution in the long run. Finally, cross-country differences in structural characteristics and initial conditions lead to divergences in the level of income per capita.

THE WORLD AFTER CORONAVIRUS PANDEMIC: CHANGING THE DEVELOPMENT PARADIGM OR PERPETUATING THE CRISIS

The world has once again faced a pandemic of an unknown virus. Unlike the others, at least when it comes to this century, no pandemic has caused such fear and led to great turbulence in production and financial flows. In the short term, it is possible to stabilize the system through the application of macroeconomic stimulus measures. However, if global economic policies continue, leading to strong social stratification, and thus subdued and unstable economic growth and perpetual financial crises, global shocks, such as this pandemic, will become more frequent, which will only deepen the problems. Sustainable and stable paths of economic growth and preparedness for systemic shocks require a fairer distribution of world income and wealth, preservation of the environment and intensive, constructive and functional cooperation between international institutions, the state, the private and civil sector and citizens.

Bibliography

Bibliography

Institutionalization of planetary management boundaries

Within the framework of the problem of institutionalization of planetary management boundaries, planetary property and planetary rent are considered as the idea of radical institutional -economic innovation designed to form the economy of optimal resource use and equitable distribution of world income. The authors use a systemic approach that emphasizes the importance of institutional analysis of rent-oriented behavior. The relevance and timeliness of theoretical and methodological approaches of the planetary management boundaries paradigm for all sectors of the economy, including agro-industrial complex. The relationship of agro-industrial and forest complexes in the mechanism of use of planetary land resources is traced. Particular attention is paid to forest rents as a value positioned in the aspect of the global bioeconomic system and plays an important role in the process of its evolution. The authors note the inevitability of conflicts of rent relations on the planetary scale, the solution of which requires the unification of efforts of the entire global scientific community.

Deep and Proximate Determinants of the World Income Distribution

This paper studies the deep and proximate determinants of the evolution of the cross‐country distribution of GDP per worker in the period 1960–2008 by a novel method based on an information criterion. We find that countries of our sample follow three distinctive growth regimes identified by two deep determinants, namely life expectancy at birth in 1960 and the share of Catholics in 1965, and that each regime is characterized by non‐linearities. Growth regimes appear to be the main cause of the increased inequality and polarization, while technological catch‐up, proxied by the initial level of GDP per worker, acts in the opposite direction. Finally, human capital marginally reduces polarization, while investment rates and employment growth have no distributional effect.

A Brief History of Economic Growth

The purpose of this article is to provide a brief general overview of the process of economic growth over the course of human history. It explores the forces that have generated the transition from stagnation to sustained growth and have contributed to the emergence of the vast contemporary inequality across countries. Furthermore, it highlights the future of global growth over next 50 years and what will happen to the world income distribution.

The world income distribution: the effects of international unbundling of production

Trade in intermediates, also known as unbundling of production, and trade in capital have become increasingly important in the world economy during the last 25 years. To jointly study these two phenomena, we develop a dynamic, factor-proportions model with trade in final goods, intermediates and capital where countries differ in their aggregate productivity levels (TFP). Our central result is to identify a novel channel whereby trade in intermediates generates a reallocation of capital across countries that exacerbates world inequality in both income and welfare. With unbundling, high-productivity countries sort into the production of capital-intensive intermediates. They increase their capital stock (via capital imports and accumulation), and, ultimately, their real wages. This exacerbates initial productivity differences across countries and increases world income inequality. We also show that income inequality rises with unbundling (i) even in the case of ex-ante identical countries (symmetry breaking), (ii) when emerging countries start participating in trade in intermediates and (iii) when a labor-saving technology (computerization) is introduced. For an empirically-motivated model parametrization, middle-income countries experience the largest output decline with unbundling.

Institutions and World Income Distribution

Institutions and World Income Distribution

Recovering Income Distributions from Aggregated Data via Micro-Simulations

For the studies of wealth, inequality and poverty, the analysis of income distribution of the individuals is a crucial issue. In practice, however, only aggregated data are available, either in groups or as a few quantiles of the distribution. These may be stratified along characteristics like gender, age, being immigrant, or education. For any scenario (for example to perform counterfactual exercises), it is then desirable to generate samples of micro income data corresponding to the same population structure. Evidently, such a method serves also for the imputation of income densities corresponding to the observed grouped data. If one is provided with quantiles or grouped data of different countries or regions, then this information can be aggregated with a proper weighting (to account for the corresponding population sizes) to obtain the joint income distribution. For the application of our method it is not required to observe the same quantiles or grouping for the different countries or provinces. As an example, this technique can be used to recover the actual or any synthetic world income distribution based on national aggregates.

Globalizing labor and the world economy: the role of human capital

We develop a dynamic model of the world economy that jointly endogenizes individual decisions about fertility, education and migration. We then use it to compare the short- and long-term effects of immigration restrictions on the world distribution of income. Our calibration strategy replicates the economic and demographic characteristics of the world, and allows us to proxy bilateral migration costs and visa costs for two classes of workers and for each pair of countries. In our benchmark simulations, the world average level of income per worker increases by 12% in the short term and by approximately 52% after one century. These results are highly robust to our identifying strategy and technological assumptions. Sizable differences are obtained when our baseline (pre-liberalization) trajectory involves a rapid income convergence between countries or when we adjust visa costs for a possible upward bias. Our quantitative analysis reveals that the effects of liberalizing migration on human capital accumulation and income are gradual and cumulative. Whatever is the size of the short-term gain, the long-run impact is 4 to 5 times greater (except under a rapid convergence in income).

Self-enforcing agreements under unequal nationally determined contributions

The Paris Agreement builds on intended nationally determined contributions (INDCs) submitted by most participating nations. The INDCs vary across nations, since national circumstances differ, including national incomes and damages. The INDCs follow a bottom-up approach, whereby nations submit their plans of actions in a Nash-like form (i.e., taking the other nations’ plans as given). We build a model with normal goods and an unequal world income distribution to consider the endogenous formation and stability of an international environmental agreement (IEA) under the bottom-up approach. Nations provide carbon abatement and produce R&D efforts that promote improvements in environmental efficiency of their outputs. Nations share R&D efforts and enjoy R&D spillovers if they join an IEA. Non-members do not enjoy R&D spillovers. Global carbon abatement rises as the IEA expands in size due to the R&D spillovers. We show that the Grand Coalition is stable under a nearly perfectly equitable income distribution, where all nations make positive carbon abatement and R&D contributions. We also consider a more realistic world income distribution, in which some nations lack sufficient income to provide carbon abatement and R&D. In this case, the stable coalition contains all (wealthier) nations that make positive abatement and R&D contributions. For a very unequal world income distribution, not even a bilateral IEA, with the two richest nations in the world, is stable. The stable IEAs provide too little carbon abatement relative to the first best.

Self-Enforcing Agreements Under Unequal Nationally Determined Contributions

For a large global economy, containing at least 195 nations, with normal goods, and an unequal world income distribution, we consider the endogenous formation and stability of an international environmental agreement (IEA) under nationally determined contributions (NDCs). Nations share green R&D efforts and enjoy R&D spillovers if they join an IEA. Nonmembers do not enjoy R&D spillovers. We show that the Grand Coalition is stable under NDCs if all nations are active carbon abatement and R&D contributors. If some nations are inactive, because they lack sufficient income to provide carbon abatement and R&D, the stable coalition under NDCs is the coalition of all active (wealthier) nations. For comparison purposes, we also show that if IEAs are subject to collectively determined contributions, the stable coalition structure is the stand-alone one.

A Bayesian Measure of Poverty in the Developing World

We propose a new methodology to revise the international poverty line (IPL) after Ravallion et al. (2009) using the same database, but augmented with new variables to take into account social inclusion in the definition of poverty along the lines of Atkinson and Bourguignon (2001). We provide an estimation of the world income distribution and of the corresponding number of poor people in the developing world. Our revised IPL is based on an augmented two-regime model estimated using a Bayesian approach, which allows us to take into account uncertainty when defining the reference group of countries where the IPL applies. The influence of weighting by population is discussed, as well as the IPL revision proposed in Deaton (2010). We also discuss the impact of using the new 2011 PPP and the recent IPL revision made by the World Bank.

Globalizing Labor and the World Economy: The Role of Human Capital

We develop a dynamic model of the world economy that jointly endogenizes individual decisions about fertility, education and migration. We then use it to compare the shortand long-term effects of immigration restrictions on the world distribution of income. Our calibration strategy replicates the economic and demographic characteristics of the world, and allows us to proxy bilateral migration costs and visa costs for two classes of workers and for each pair of countries. In our benchmark simulations, the world average level of income per worker increases by 12% in the short term and by approximately 52% after one century. These results are highly robust to our identifying strategy and technological assumptions. Sizable differences are obtained when our baseline (pre-liberalization) trajectory involves a rapid income convergence between countries or when we adjust visa costs for a possible upward bias. Our quantitative analysis reveals that the effects of liberalizing migration on human capital accumulation and income are gradual and cumulative. Whatever is the size of the short-term gain, the long-run impact is 4 to 5 times greater (except under a rapid convergence in income).