Statistically, How Thankful Should We Be: A Look at Global Income Distributions, part 2

Minitab Blog Editor 15 November, 2013

In my previous post, I looked at how personal income levels fit into the global distribution of incomes. Although, I’d be the last person to suggest that a higher income guarantees more happiness—after all, I’ve visited a number of developing countries and, as long as their basic needs are met, the people seem to be just as happy and hard working as people here at home.

So instead of personal income levels, I’d like to assess something more meaningful: global well-being. How does the overall global welfare today compare to 1970? Do more people have their basic needs met? That’s what we’ll look at in this post, and there’s good news here!

To evaluate global well-being, I’ll assess how global poverty and income inequality have changed.

Global Poverty Levels from 1970 to 2006

Depending on the organization and year, there are several official poverty lines for developing countries. I’ll use the $1 a day poverty line, which equates to US $312 in 2006 dollars. Using the other common poverty lines ($2, $3 a day, etc) produces similar results.

Below are a couple of representative examples of developing countries to illustrate the global trend. The shaded region in the graphs show how the proportion of those living below the poverty line in Ecuador and rural China have dropped remarkably since 1970.

Distribution graph that shows declining poverty in Ecuador from 1970 to 2006

Distribution graph of the decling level of povery in China from 1970 to 2006

The same pattern applies to the United States. While it’s hard to match a single per capita income value to the different household sizes and incomes that the Census bureau uses to measure poverty, a per capita value of $5000 is close for most household sizes.

Distribution graph that shows declining poverty in the United State from 1970 to 2006

The graph shows that the percentage of those in the United States with a per capita income of less than $5000 has dropped from 5.6% to less than 1%.

To assess poverty changes on a global scale, Pinkovskiy and Sala-i-Martin combined 119 country distributions, and found:

Using the official $1/day line, we estimate that world poverty rates have fallen by 80% from 0.268 in 1970 to 0.054 in 2006. The corresponding total number of poor has fallen from 403 million in 1970 to 152 million in 2006. . . . We also find similar reductions in poverty if we use other poverty lines. . . We learn that not only are poverty rates falling, but that they are falling faster than population is rising.

Global Income Inequality from 1970 to 2006

While the poverty rates have dropped significantly over the past 30 years, income inequality within most countries has increased. I want to determine whether this negatively affects global well-being.

You can see the increasing inequality in the scale parameters that generally increase over time, which produces a wider spread in the graphs. There are more complex measures of inequality, such as the Gini coefficient, but I’ll illustrate the principle using the income ratio of the 90th and 10th percentile of earners in the United States.

Distribution graph that shows the 10th and 90th income percentiles in the U.S. for 1970 and 2006

The graph displays the per capita income values for the 10th and 90th percentiles in the United States. The ratio of the high to low incomes increases from 5.3 in 1970 to 6.6 in 2006. A similar pattern exists for most countries and indicates that income inequality is increasing within countries.

While increasing inequality may sound detrimental, keep in mind that it occurs during a time where both the proportion and absolute counts of people living in poverty is sharply declining. Also, counter-intuitively, while income inequality is increasing within most countries, it is actually decreasing globally.

The two graphs below use China and the United States as examples to show how this works. I picked these countries because they both have large economies and are representative of the global trend. In my last post, I compared these two countries to show how different they were in 2006. However, in 1970, they were far more different. Over the decades, China’s income distribution has gained ground.

Comparison of China's and the U.S.'s distribution of incomes in 1970

Comparison of China's and the U.S.'s income distributions in 2006

These two graphs highlight the region where the two economies overlap in 2006. However, in 1970, there was almost no overlap. I shaded the range of $2500-$7500 for Chinese incomes in this overlap zone to illustrate the Chinese gains over time.  In 1970, virtually no Chinese had per capita incomes in this range, while 53% were in this range in 2006. Also, note how the distribution for each country has a wider spread, which indicates that the within-country income inequality is increasing.

The global picture follows the same pattern: within-country inequality has increased but the between country inequality has decreased by an even greater amount. The net result is that global income inequality has decreased.

In short, income equality in 1970 was greater because more people were very poor. Inequality has increased since then because fewer people are living in severe poverty.

Perhaps the growing within-country inequality isn’t as bad as it first seems?

Pinkovskiy and Sala-i-Martin conclude, “We find that various measures of global inequality have declined substantially and measures of global welfare increased by somewhere between 128% and 145%.”

Closing Thoughts

All in all, I think this is great news and something we can all be thankful for! Poverty levels are sharply down and measures of global welfare are increasing. While income inequality is increasing, that simply reflects that fact that there are far fewer people living in poverty.

There is still a ways to go, because severe poverty has not been eliminated. In today’s world, severe poverty is generally found in Africa where the rates actually climbed much of the time and only recently began a slight decline. According to Pinkovskiy and Sala-i-Martin, “Welfare unambiguously deteriorated in 23 countries, totaling less than 5% of the world’s 2006 population.”

Looking beyond incomes, there are countries with human rights violations that are not reflected in these promising results. There's also the issue of unequal rights and opportunities.

That said, these findings were a nice surprise to me because usually you only hear the bad news. The decrease in poverty is a longstanding trend that persists over decades, which is a great sign for the future!

Happy Thanksgiving!