The Rich Get Rich and Poor Get Poorer. Or Do They?
By Virginia Postrel on August 15, 2002
To critics of economic liberalization and international trade, it is an article of faith that the rich are getting richer and the poor poorer.
"Inequality is soaring through the globalization period — within countries and across countries," Noam Chomsky told a conference last fall, summarizing this common view.
Antiglobalization activists are not just making up this idea. They have taken it from seemingly authoritative sources, notably the 1999 United Nations Human Development Report.
That widely cited report stated: "Gaps in income between the poorest and richest countries have continued to widen. In 1960 the 20 percent of the world's people in the richest countries had 30 times the income of the poorest 20 percent — in 1997, 74 times as much." It added that "gaps are widening both between and within countries."
Fortunately, this scary portrait is highly misleading.
"When I started looking at the numbers, I saw a lot of mistakes," says Xavier Sala-i-Martin, an economist at Columbia. Some were departures from standard economic procedures, like not correcting for price levels from country to country.
"Some agencies didn't adjust for the fact that Ethiopia is cheaper than the U.S.," he said. "Some of them were hiding numbers that we know exist." For instance, the report included data from only 19 of the 29 industrialized countries then in the Organization for Economic Cooperation and Development.
But the biggest problem was not so technical. It was hidden in plain sight. The United Nations report and others looked at gaps in income of the richest and poorest countries — not rich and poor individuals.
That means the formerly poor citizens of giant countries could become a lot richer and still barely show up in the data.
"Treating countries like China and Grenada as two data points with equal weight does not seem reasonable because there are about 12,000 Chinese citizens for each person living in Grenada," writes Professor Sala-i-Martin in "The World Distribution of Income (Estimated from Individual Country Distributions)." That is one of two related working papers for the National Bureau of Economic Research. (The papers are available on Professor Sala-i-Martin's Web site.)
Counting by countries misses the biggest economic advance in history, completely distorting the record of the globalization period.
Over the last three decades, and especially since the 1980's, the world's two largest countries, China and India, have raced ahead economically. So have other Asian countries with relatively large populations.
The result is that 2.5 billion people have seen their standards of living rise toward those of the billion people in the already developed countries — decreasing global poverty and increasing global equality. From the point of view of individuals, economic liberalization has been a huge success.
"You have to look at people," says Professor Sala-i-Martin. "Because if you look at countries, we do have lots and lots of little countries that are doing very poorly, namely Africa — 35 African countries." But all Africa has only about half as many people as China.
In his paper, "The Disturbing `Rise' of Global Income Inequality," he estimates the worldwide distribution of income by individuals rather than countries. The results are striking.
In 1970, global income distribution peaked at about $1,000 in today's dollars, a common measure of poverty ($2 a day in 1985 dollars). In 1998, by contrast, the largest number of people earned about $8,000 — a standard of living equivalent to Portugal's.
"That's what I call a new world middle class," says Professor Sala-i-Martin. It is mostly made up of the top 40 percent of Chinese and Indians, and the effect of their economic rise is big.
What about the argument that income gaps are widening within these rapidly advancing countries? With a few exceptions, it is true, but still misleading.
The rich did get richer faster than the poor did. But for the most part the poor did not get poorer. They got richer, too. In exchange for significantly rising living standards, a little more internal inequality is not such a bad thing.
"One would like to think that it is unambiguously good that more than a third of the poorest citizens see their incomes grow and converge to the levels enjoyed by the richest people in the world," writes Professor Sala-i-Martin. "And if our indexes say that inequality rises, then rising inequality must be good, and we should not worry about it!"
There is, however, one large country where the poor really are getting poorer while the rich grow richer: Nigeria, the most populous country in Africa.
Nigeria's economy has actually shrunk over the last three decades, and the absolute poverty rate — the percentage of the population living on less than $1 a day in 1985 dollars — skyrocketed to 46 percent in 1998 from 9 percent in 1970.
While most Nigerians were falling further into destitution, the political and economic elite grew richer. The problem is not too much liberalization but too little, a politicized economy with widespread corruption.
"The rich guys are doing well, therefore reforms will not come," says a pessimistic Professor Sala-i-Martin. He has begun studying Nigeria, trying to come up with ways around the political problem.
That country is typical of Africa, which is growing ever poorer. Fully 95 percent of the world's "one-dollar poor" live in Africa, and in many countries they make up the vast majority of the population. That poverty, not the rising wealth of Asian countries, is the global economy's real problem.
"The welfare implications of finding how to turn around the growth performance of Africa are so staggering," he writes, "that this has probably become the most important question in economics."