3.7 Global poverty and inequality

the distribution of income

The distribution of income describes how income in a society is divided among its people or groups, such as between individuals, households, or social classes.

How the institutions of capitalism combine with political and other institutions can affect the distribution of income. Why? Because institutions shape the choices people have and the power that some groups can exercise over others.

Global poverty

extreme poverty

Extreme poverty is defined as living below the International Poverty Line of $3 per day in 2021 international dollars. The World Bank defines the International Poverty Line (IPL).

Mirroring the hockey sticks of income and carbon dioxide is the transformation from a world in which the vast majority of people struggled to meet their basic needs for food and shelter to the world today, where only about 10% of the population struggles to survive. Before the upward kink in history’s hockey stick, some people were rich by the standards of their day, but most people lived in extreme poverty. Those living in extreme poverty are often hungry, have no access to electricity (and therefore no light at night, for example), and have limited access to schooling or health care.

You can explore extreme poverty further in this article in OWiD.

Looking at Figure 3.6, we see a decrease in the share of people living in poverty over time. The decrease accelerated in the twentieth century because the slope of the line is steeper after 1950. The steeper slope means that the change over that period is greater.

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Figure 3.6 Share of the world population living in extreme poverty, 1820–2018.

Michail Moatsos. 2021. “Global extreme poverty: Present and past since 1820.” OECD; How Was Life? Volume II: New Perspectives on Well-Being and Global Inequality Since 1820. OECD. “pp” is an abbreviation for “percentage points”.

Compare the period 1900–1950 to the period 1951–2000. During the first half of the twentieth century, the share of people in poverty decreased from 60% to 53%, a decrease of 7 percentage points, but in the same length of time (1950 to 2000), the share of people in poverty decreased from 53% to 25%—a 28 percentage point decrease. That’s four times as much over the same amount of time.

The distribution of income

A thousand years ago, the world was flat, economically speaking. There were major differences in income between the world’s countries and regions but, as Figure 3.1 shows, the differences between countries were small compared to what followed.

Today, 14% of the world’s population lives in countries with lower average income than India. Because 18% of the world’s population lives in India, a total of 32% of the world’s population lives in countries with average income less than or equal to that in India.

In terms of income, nobody thinks the world is flat today. Figure 3.7 provides a snapshot for 2019. Several countries are lined up from left to right according to average income, with the poorest (South Sudan) on the left and the richest (United Arab Emirates) on the right. The width of the bars reflects the size of the population, with the bars for China and India the widest because they have the biggest populations. The horizontal scale shows the cumulative share of the world’s population, with 100% at the far right.

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Figure 3.7 The global income distribution in 2019: average daily income by country with a selection of countries labeled.

M. Roser. 2021. “Global Poverty in an Unequal World: Who Is Considered Poor in a Rich Country? And What Does this Mean for Our Understanding of Global Poverty?” Our World in Data.
Poverty and Inequality Platform. “Mean Income or Expenditure per Day”;
The World Bank. 2022. “Population, Total”.
Note: Average income is measured in “international dollars,” which enables comparisons of the purchasing power of incomes to be made across countries; this measure is known as purchasing power parity.

purchasing power parity (PPP)

Purchasing power parity is a price index that measures how much it costs to purchase a basket of goods and services in a specific country compared to how much it costs to purchase the same basket in a reference country in a particular year, such as the United States in 2011.

On the vertical axis is the average daily income, measured in such a way that 20 international dollars, for example, is what a person in any given country can buy in goods and services that cost 20 US dollars in the United States. Economists measure prices using purchasing power parity⁠ to make these comparisons. At the bottom of the distribution are the 10% of countries where people on average live in extreme poverty: their daily income is just a few dollars a day. The snapshot provided by average incomes shows big differences between countries, but it does not show the vast differences in living standards within each country.

the distribution of income

The distribution of income describes how income in a society is divided among its people or groups, such as between individuals, households, or social classes.

Figure 3.8 goes a step further by building a three-dimensional picture that shows the distribution of income within countries as well as between them, and how this distribution changed between 1980 and 2020. Again, countries are arranged from the lowest average income in that year on the left (South Sudan in 1980) to the highest on the right (Switzerland in 1980). For every country now there are ten bars, representing the country’s population divided into income groups. Each group contains 10% of the population, and the height of the bar is the group’s average income, ranging from the poorest 10% of households at the front of the diagram to the richest 10% at the back, measured in 2021 US dollars.

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Figure 3.8 Global income inequality 1980 (top panel) and 2020 (bottom panel). Countries are ranked by income per capita from left to right. For each country, the heights of the bars show average income, from the poorest 10% at the front to the richest 10% at the back. The width of the bar indicates the country’s population. Each country is colored based on its average income in 1980 so that we can see how countries change their position over time.

World Inequality Database (WID). You can download the data for all countries and years used in the skyscraper figures here. Robert Sutcliffe designed the representation of global inequality in Figure 3.8. A first version was published in: Robert B. Sutcliffe (2001) 100 Ways of Seeing an Unequal World, Zed Books, using the data in the Global Consumption and Income Project (GCIP) 2015.

The skyscrapers (the highest columns) at the back of the right-hand side of the two panels represent the income of the richest 10% households in the richest countries. In 2020, the tallest skyscraper represents the richest 10% in the United Arab Emirates. In 2020, this exclusive group had an average income per capita of around $390,000. Norway, the country with the second-highest GDP per capita, does not have a particularly tall skyscraper (it is hidden between the skyscrapers for the United Arab Emirates and the third-richest country, the United States) because income is more evenly distributed in Norway than in some other rich countries. Closely examine the steps in Figure 3.9 to understand how income within and between countries has changed over time.

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Figure 3.9 The world income distribution within countries and across countries over time.

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The axes for the skyscraper graph

The vertical axis measures the annual income in 2021 US dollars to compare countries in 2020, 2000, and 1980. Along the horizontal axis we compare across countries. The countries are ranked from the poorest by their average income from left (Somalia) to the richest on the right (United Arab Emirates). Within countries, we compare by the depth of the figure from the poorest 10% to the richest 10% within each country within a given year.

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Comparing the richest (United Arab Emirates) and poorest (Somalia) in 2020.

Let us examine first the distribution of income in 2020. In the United Arab Emirates (UAE), the richest country on the furthest right, the average incomes are $389,750 for the richest 10% and $1,522 for the poorest 10%. You can identify how high the highest incomes in UAE are relative to the lowest incomes by comparing the height of the bar in the top-right to the bar in the bottom right. In Somalia, the furthest left, the average incomes are $6,894 for the richest 10% and $16 for the poorest 10%. The countries are colored by their average income in 1980 so that we can identify countries that change position over time (see Figure 3.8). The richest in 1980 are shown by a bright yellow and the poorest by a deep purple. The width of a country corresponds to the population of that country. In 2020, the population of Somalia was 16.65 million and the population of UAE was 9.4 million, making both countries relatively small compared to other countries and therefore the width for each country is narrow.

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Skyscrapers of the richest 10% in the 10 richest countries in 2020.

The skyscraper bars in the back right of the figure are the richest 10% in some of the richest countries. We call them skyscrapers because the incomes correspond to the highest incomes for the richest countries and they look like skyscrapers compared to the countries with lower incomes and compared to the poorer shares of income in their own countries. The thicker bar corresponds to the USA, which had a population of 331.5 million in 2020, which is why the size of its bar is thicker compared to the other countries (like the smaller UAE at the top). The thin slice of a country in between the USA and the UAE is Norway, which has a high average income, but also lower inequality than the US and UAE because the richest 10% have lower incomes than in the US and UAE.

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World income distribution in 1980 (Figure 3.8, top panel).

In 1980, the ranking of countries by GDP was different to the ranking in 2020. The poorest countries, colored darkest purple, were South Sudan, Somalia, and Mozambique. The richest (bright yellow) were Switzerland, the Netherlands, and Germany. In 1980, the skyscrapers were not as tall as in 2020: the differences between the richest 10% and the rest of a country’s population were not as pronounced in 1980 as they are in 2020. Nonetheless, the inequality across and within countries can still be seen when comparing the incomes of the richest 10% to the poorest 10% within countries and the variation in the heights of the columns for the richest compared to the poorest countries. Notice that the bars for India and China are thick because their populations in 1980 were larger than almost all other countries in the graph.

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World income distribution in 2000.

The colors indicate how some countries changed their ranking between 1980 and 2000. Both China and Indonesia used to be relatively poor (purple) but moved towards the middle of the distribution (middle of the ranking of the countries by average income) in 2000. Some taller skyscrapers have appeared at the back: inequality increased in many countries during the 1980s and 1990s up to 2000.

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World income distribution in 2020 (Figure 3.8, bottom panel).

By 2020, many countries have changed their ranking. China grew rapidly between 2000 and 2020 and therefore moved further to the right. Other countries, like Brazil, that were relatively richer in 1980 (orange-yellow) have moved further left, showing that their economies have not grown as rapidly as other countries. The countries that were richest in 1980 (bright yellow), such as the US and Norway, are still near the top in 2020, suggesting that inequality among countries persists. Inequality in China and India also grew between 2000 and 2020, as shown by the growth in incomes of the top 10% in both countries compared to the lower income groups in both countries.

rich/poor ratio

The rich/poor ratio is the ratio of the average income of the richest 10% of the population to the average income of the poorest 10% of the population within a country. It is a measure of inequality in a country.

inequality

Inequality refers to the degree to which income, wealth, or other economic resources are distributed unevenly among people or groups in a society. It can be measured using statistical tools such as income percentiles, the Gini coefficient, or income shares held by different segments of the population (for example, the top 10% vs. the bottom 10%, called the Rich/Poor ratio).

Two things are clear from the distribution of income in 2020. First, in each country, there are large differences in income between the richest and the poorest 10% of households. We can use the ratio between the heights of the front and back bars, called the rich/poor ratio, as one measure of inequality in a country. The rich/poor ratio is the ratio of the average income of the richest 10% of the population to the average income of the poorest 10% of the population within a country. In the United States, the rich/poor ratio is 244, which means that in the United States in 2020, the richest 10% of the population had incomes 244 times as large as the poorest 10%. Even in a relatively equal country such as Norway, the rich/poor ratio is 66. In Botswana in southern Africa, it is 488. Inequality also exists within the poorest countries. For example, the rich/poor ratio is 174 in Nigeria and 246 in India.

Also apparent in Figure 3.9 are the huge differences in income between countries. In 2020, the average income in Norway was nearly seven times the average income in Nigeria. What other differences do you notice?

Math Extension 3.7 Unpacking the skyscraper graph: Deciles and the rich/poor ratio

decile

A decile is a group containing 10% of the population.

Figure 3.8 shows the distribution of income within countries as well as between them, and how the income distributions changed between 1980 and 2020. For every country in Figure 3.8 there are ten bars that represent each country’s population divided into income groups. These bars are called deciles of income.

To understand income deciles, it is useful to think of a country’s GDP as a pie. When we think of income deciles, we think about slicing up the pie into ten pieces. Now imagine that the ten groups of people getting the slices correspond to the ranks of people from poorest to richest in terms of their annual incomes. If everyone had the same annual income, then the slices of pie would be the same size (the “poorest” and the “richest” would have the same income). In reality, the poorest have much lower annual incomes than the richest.

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Figure E3.3 A and B Panel A: A pie chart for China’s 1980 income distribution in deciles from poorest to richest.
Panel B: Income deciles for China in 1980 from poorest to richest. Note that this measure doesn’t mean “the richest 10% of income earners.” Instead, it means the richest 10% of people, where each person in a household, including children, is assumed to have an equal share of the household’s income.

World Inequality Database 2022.

Figure E3.3 shows a pie chart of China’s income deciles from richest to poorest in 1980. In chart A, the size of each slice corresponds to the height of the bar (in terms of income) in panel B. Each slice in panel A has the same colors as the corresponding bar in panel B to make it easier to see how they correspond to each other. We chose China in 1980 because the size of the slice of the poorest 10% is visible. If we had chosen the United States instead, then the size of the slice for the poorest 10% would not be visible in the pie chart because the slice would be too thin to see—the poorest 10% have so little money that we can’t see their average income relative to other people in the economy.

rich/poor ratio

The rich/poor ratio is the ratio of the average income of the richest 10% of the population to the average income of the poorest 10% of the population within a country. It is a measure of inequality in a country.

The bar charts of income deciles in chart B are helpful because they show us the average income of each “slice” or decile of the economy. We can use the ratio between the heights of the bars for the richest 10% and the poorest 10% as one measure of inequality in a country. We call this measure the rich/poor ratio, because it is the ratio of the income of the richest people to the income of the poorest people within a country. In China in 1980, the richest 10% had average incomes of $8,368 and the poorest 10% had average incomes of $144, so the rich/poor ratio was $8,368/$144, which is approximately equal to 58. So, in China in 1980 the richest 10% of the population had incomes 58 times as large as the poorest 10%.

We can also use the bar charts of income deciles to compare incomes across countries. Figure E3.4 does exactly this by comparing the income inequality in a set of countries in two specific years: 1980 (figures on the left) and 2020 (figures on the right).

What does inequality look like in the countries that took off economically before 1900—for example, Japan, Norway, and the United States? In 1980, for all three countries, the incomes of the poorest 10% are almost invisible (top of Figure E3.4) and the incomes of the richest 10% tower over the others. From 1980 to 2020, the incomes of the richest 10% in the United States more than doubled (going from about $142,000 to over $325,000). The figure also shows that Norway is a more equal country than the United States: Norway’s income bars are higher than the US bars for each decile except the top two. Norway has a higher average income than the United States and lower inequality. US inequality is among the highest in the wealthy parts of the world. As Table E3.3 shows, the rich/poor ratio is 66 in Norway, 153 in Japan, and 244 in the United States. By this measure, inequality in the US is 3.7 times as great as in Norway.

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Figure E3.4 A and B Income deciles for Japan, Norway, the United States, India, China, Nigeria, and Botswana in 1980 (panel A) and in 2020 (panel B).

World Inequality Database 2022.

Country	Poorest 10% average income	Richest 10% average income	Rich/poor ratio	Average income (per capita GDP in 2021 international $)
Norway	3,323	220,314	220,314/3,323 = 66	52,336
Japan	1,201	183,965	183,965/1,201 = 153	29,629
United States	1,344	327,322	327,322/1,344 = 244	51,572
China	471	95,884	95,884/471 = 204	16,497
India	218	53,556	53,556/218 = 246	7,022
Nigeria	266	46,347	46,347/266 = 174	7,936
Botswana	259	126,390	126,390/259 = 488	14,399

Table E3.3 Income data for a selection of countries in 2020.

World Inequality Database 2022.

In 1980, the income distributions in China and India were fairly similar, with incomes in China being just slightly larger than those in India. But, as Figure 3.1 shows, China experienced a faster growth rate than India did over the period 1980 to 2020. The incomes in the figure for China and India in 2020 increase according to the economic growth that each country experienced. As Table E3.3 below shows, the rich/poor ratio in both countries was more than 200 in 2020: each had experienced growth in average incomes alongside growth in within-country inequality. Now compare the experience of India and China to two countries in Africa: Botswana and Nigeria. Botswana started off with somewhat more inequality than Nigeria, and average income was $10,153 for Botswana and $9,458 for Nigeria. After 40 years, their average incomes had increased substantially and Botswana’s average income was almost double Nigeria’s (Table E3.3). Inequality was much greater in Botswana, with a rich/poor ratio of 488 compared to Nigeria’s ratio of 174.

Question E3.4

Which of the following statements about the rich/poor ratio are correct? Choose all that apply.

• The rich/poor ratio measures the ratio of the income of the richest 10% to that of the poorest 10% in a country.
• A high rich/poor ratio indicates a low level of income inequality.
• Higher rich/poor ratios tend to be associated with lower GDP per capita.
• The rich/poor ratio provides a comprehensive picture of income distribution across all income levels.

• This is the definition of the rich/poor ratio.
• A high ratio indicates greater income inequality.
• Higher rich/poor ratios are not necessarily linked to lower GDP per capita; some high-income countries, such as the United States, have a high rich/poor ratio.
• The rich/poor ratio compares only the extremes, not the full distribution.

Exercise E3.4 Norway vs United States: Differences in equality

Norway and the United States have similar average income levels but very different rich/poor ratios. Research and explain two specific policies or institutional features that help explain why Norway’s rich/poor ratio is much lower than that of the US’s.