The Rise and Fall of Worldwide Income Inequality, 1820-2035

Development is a process and there are at least four phases of the process: (1) pre-development, (2) initial growth, (3) improved productivity, and (4) receding growth. Other things constant, the growth of per capita GDP will be higher in phases 2 and 3 than phases 1 and 4. The development process and accompanying demographic changes explain both the nearly two centuries of increasing income inequality prior to 2000 and the reversal of this trend that followed. During 1820-1950, the growth of per capita income was slow and most of the world was in phase 1 of development. However, about 20 countries mostly in Western Europe, North America, and Oceania, moved out of phase 1 and grew more rapidly than the rest of the world, widening income inequality. Between 1960 and 2000, an increasing share of developing countries moved into phase 2 and achieved growth rates similar to the high-income countries, slowing the rise in inequality. By 2000-2015, most of the developing countries had moved into phases 2 and 3, where growth rates are higher, and the high-income countries were sliding into phase 4, where growth is slower. This combination resulted in a sharp reduction in worldwide income inequality. The Gini coefficients for both cross-country and worldwide income inequality confirm these trends. Moreover, the continuation of favorable demographics, lower cost of transportation and communications, improvements in institutions, increases in human capital, and progress against malaria are accelerating growth in developing countries. These forces virtually assure that the recent reductions in worldwide income inequality will continue in the near term