This Outrageous Global Inequality Is a Political Choice

The World Inequality Report 2022, produced by the Paris-based World Inequality Lab, is a remarkable document for many reasons--starting with its demonstration of the immense power of patient collective research.

The primary cause of "predistributive" inequality is, in a word, privatization: of finance, the natural commons, the knowledge commons (through intellectual-property rights), and public services and amenities.

The report provides the latest estimates, based on careful aggregation of national data from a multitude of sources, of income and wealth inequality at the national, regional, and global level. It gives long-run time-series data for these indicators, allowing us to consider recent patterns in a broader historical context. And it expands on different dimensions of inequality in revealing new ways.

Any research enterprise as ambitious as this one will inevitably elicit quibbles about the datasets used, the assumptions required to generate particular series, and the ways in which some data gaps have been filled. My own minor criticism relates to the World Inequality Lab's use of purchasing power parity (PPP) exchange rates to determine and compare national incomes across countries.

As I have argued elsewhere, while PPP exchange rates appear to control for cross-country differences in price levels and living standards, they are ridden with conceptual, methodological, and empirical problems. For starters, PPP exchange rates assume that the structure of each country's economy is similar to that of the benchmark country (the United States) and changes in the same way over time. When applied to developing economies, this assumption is especially weak.

Moreover, the convoluted weighting procedure for goods can result in the inclusion of unrepresentative, high-priced products that are rarely consumed in some countries. For example, Angus Deaton has noted how packaged cornflakes may be available in poor countries but are bought by only a relatively small minority of rich people. Expenditure weights from national accounts do not reflect the consumption patterns of people who are poor by global standards.

There is a further, and possibly even more troubling, conceptual issue. High-PPP countries--that is, those where the actual purchasing power of the local currency is deemed to be much higher than its nominal value--are typically low-income economies with low average wages. PPP is high precisely because a significant section of the workforce receives very low remuneration, which means that goods and services are available more cheaply than in countries where the majority of workers receive higher wages. The widespread incidence of unpaid labor in many poor households in low-income countries further amplifies the effect. So, it is clear that the local currency's greater purchasing power reflects conditions of indigence and low or no remuneration for what could even be the majority of workers.

PPP-modified GDP data may therefore miss the point. By regarding greater purchasing power of a given monetary income as an advantage, rather than a reflection of the greater absolute poverty of the majority of an economy's workers, PPP estimates effectively overstate poorer countries' incomes compared to those of rich economies.

For all these reasons, relying on PPP exchange rates in cross-country income comparisons--including for poverty and inequality measures--is extremely problematic. There is a strong case for sticking to market exchange rates in measuring cross-country inequality, which would likely reveal much greater disparities than those evident in the World Inequality Report.

This objection notwithstanding, the report adds much to our understanding of inequality, especially through two new measures. The first is the female share of labor income, which is a useful indicator of gender inequality. Globally, this share has remained largely unchanged over the past three decades, at one-third, and has been as low as 10-15% in the Middle East and North Africa (MENA) and below 20% in Asia excluding China. This indicator captures not just labor-market imbalances, but also, implicitly, the greater proportion of unpaid work performed by women within households and communities, which reduces their access to paid work and affects their remuneration in paid employment.

The second innovative measure examines inequality in carbon-dioxide emissions by assessing contributions by income category across countries. The important finding here is that, while inequalities in emissions across regions are high and persistent, such disparities exist not only between rich and poor countries, but within them. There are high emitters among the rich in low- and middle-income countries, and relatively low emitters among the poor in high-income countries.

For example, the richest 10% of people in the MENA region emit 33.6 tons of CO₂ per person per year, compared to less than ten tons among the bottom half of the income distribution in North America. (The bottom 50% in Sub-Saharan Africa emit one-twentieth of the North American amount, or 0.5 tons per capita per year.)

Globally, the richest 10% of the population is responsible for more than half of all CO₂ emissions. This point is especially important because, as the report notes, environmental policies like carbon taxes hit the poor the hardest, but this group is rarely if ever compensated for such measures. The new indicator enables a much richer consideration of what socially just climate policies should look like, both within and across countries.

Predictably, the report is strong on appropriate redistributive policies, especially the potential for increased taxation of wealth and corporate profits. There is also scope for looking more closely at "predistribution," or the range of regulatory regimes and legal codes that have enabled today's excessive concentration of wealth and income in the first place.

The primary cause of "predistributive" inequality is, in a word, privatization: of finance, the natural commons, the knowledge commons (through intellectual-property rights), and public services and amenities. One could add to that states' tendency--glaringly obvious since the 2008 global financial crisis--to protect large-scale private capital, while allowing it to wreak havoc on ordinary citizens.

The reality captured by the World Inequality Report reflects human choices, which means that it can be changed by making other choices. That is why the report is much more than a valuable compendium of useful data and analysis. It is a guide to action.