Income growth of the poor matters for reducing global income inequality

The three decades before COVID-19 saw an almost continuous decline in global inequality, defined as the inequality in income among all citizens of the world (or Concept 3 inequality defined in Milanovic 2005). As we show in a recent paper (and as has been noted before), we find that relatively high-income growth in the initially poorer parts of the world drove the reduction in global income inequality over this period. However, replicating the historical growth in the same countries, most notably China, will not be sufficient for a similar decline in global inequality in the coming decades. Instead, relatively higher growth in China and similar countries that grew over the last 30 years could add to global income inequality. Further reductions in global inequality will require much faster growth in the countries that are poor today.

Following Mahler ⓡ Yonzan ⓡ Lakner (2022), we construct a global income distribution using survey microdata available for 170 countries (covering 97% of the global population) in the Poverty and Inequality Platform. We study the changes in global inequality in the three decades before Covid-19 pandemic and the three decades after the pandemic.

The decline in global income inequality in the three decades leading to the pandemic

Global income inequality declined almost continuously in the three decades before the pandemic primarily driven by the relatively faster income growth in populous countries, particularly China, compared to richer parts of the world (for detailed discussion, see Lakner and Milanovic, 2016; Deaton 2021; Mahler ⓡ Yonzan ⓡ Lakner 2022; Milanovic 2024). The global Gini index fell from 70 points in 1990 to 62 points by 2019, an annualized decline of -0.42% (Figure 1a). For the three decades, Figure 1b shows the average income growth of each person in the world grouped into 100 percentiles ranked by income. In all three decades, we see relatively higher income growth for the bottom 60% of the world compared to the top 40%. In other words, the poorer parts of the world in relative terms caught up to the richer parts of the world. This explains the decline in global income inequality we see in Figure 1a. 

Figure 1: Global inequality has decreased driven by higher pro-poor growth

Figure 1a: Global Gini index

Figure 1b: Global growth incidence curves

_{Source: Authors’ calculation using Poverty and Inequality Platform (September 2024).} 

_{Note: Figure 1a shows the trends in the global Gini index. The Gini index ranges from 0 (most equal) to 100 (most unequal). Figure 1b shows the annualized growth of each global income percentile for the 1990—2000, 2000—2010, and 2010—2019 periods (i.e., the anonymous growth incidence curve).} 

The Covid-19 pandemic was the largest setback to global inequality in recent memory 

The Covid-19 pandemic abruptly ended the three decades of decline in global income inequality. The increase in global inequality in 2020 was the largest experienced since at least 1990, when comprehensive survey data for the world became available. Countries were impacted differentially resulting in diverse income shocks, which then drove global inequality up.

Figure 2 shows the year-on-year change in total inequality decomposed into contribution of within-country and between-country components (shown here using the mean log deviation, MLD, as this indicator is easily additively decomposable). The between-country component increased total inequality by 3.3% in 2020 compared to 2019, which is three times the increase that was experienced during the entire Asian financial crisis (1997—98). During the Asian crisis, between-country inequality increased for two consecutive years for a total contribution of 1.1% in the overall change on total inequality. The average within-country inequality on the other hand contributed to a decrease of 1.2% of total inequality in 2020 compared to 2019. In other words, if everyone in each country had experienced the same shock or if there was no change in within-country inequality, total global inequality would have increased by 3.3% instead of the observed 2.1%. The changes in within-country inequality on average played an equalizing role in 2020. These findings are corroborated by Mahler ⓡ Yonzan ⓡ Lakner (2022), whose estimates are also reported in the figure (see the 2020* bars).

Figure 2: The Covid-19 pandemic was a largest setback for global inequality

_{Source: Authors’ calculation using Poverty and Inequality Platform (September 2024) and Mahler ⓡ al. (2022).} 

_{Note: The figure reports the year-on-year percentage change in total inequality decomposed into contributions by within- and between-country mean log deviation (MLD). The percentage change in overall inequality is the sum of the two bars. The shaded regions are the Asian financial crisis (1997-1998) and the Covid-19 pandemic (2020). The figure also reports an alternative estimate of the changes in MLD due to the Covid-19 pandemic from Mahler ⓡ Yonzan ⓡ Lakner (2022) updated with the September 2024 vintage of data from the Poverty and Inequality Platform (plotted as 2020*).}

The pathway forward remains uncertain

The future of global inequality largely depends on how incomes grow in various parts of the world. If the growth trends of the last three decades continue, global inequality may increase as those countries, which drove the reduction in inequality in the past, will now start adding to it. However, if poorer countries today grow faster than their richer peers, inequality globally could continue to fall. What will happen?

Looking forward, we broadly find three potential trends for global inequality. First, if countries continue to grow in the manner they did over the last three decades before the pandemic (i.e., business-as-usual), global income inequality will likely stagnate initially but trend slightly upwards by 2050 (Figure 3). By how much and when the upturn will start depends on the relative growth and population differences between large populations in China, India, Sub-Saharan Africa, and the group of rich, mostly western, countries (see also Kanbur, Ortiz-Juarez, and Sumner, 2022). Second, global inequality could start increasing more significantly if there was stagnation of country-level growth in the poorer parts of the world and if within-country inequality increases (pessimistic scenario in Figure 3). Finally, there is also a more positive scenario which would decrease global inequality. However, this decrease will require very high growth in the poorer parts of the world compared to richer parts. The countries that have experienced per capita annual growth rates under 1% most recently would be expected to grow at a rate that is 5-times higher.

Figure 3: Potential pathways for global inequality 2025-2050 

_{Source: Authors’ calculations using Poverty and Inequality Platform (September 2024), Crespo Cuaresma, (2017), Mahler ⓡ al. (2022), Rao et al (2019).}

_{Note: Business-as-usual scenario is based on distribution-neutral projection of country income distributions using average annual historical growth rates faced by each country in the period 2010-2019; Optimistic and pessimistic scenarios involve changes in both within-country inequality and across-country average growth rates.}

While a near 5% growth in poor countries seems unreasonable at first, it is important to consider that middle-income countries that were poor in the past have managed to sustain even higher levels of income growth. For a livable planet, however, future growth must not only be rapid but also sustainable. If growth is unsustainable, it could lead to further harm to vulnerable populations, particularly those that reside in poorer countries (for further discussion, see the 2024 Poverty, Prosperity, and Planet Report). 

The authors gratefully acknowledge financial support from the UK Government through the Data and Evidence for Tackling Extreme Poverty (DEEP) Research Program.