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The World’s Income Odyssey

How can you best evaluate income inequality between the rich and the poor countries of the world?

May 25, 2001

How can you best evaluate income inequality between the rich and the poor countries of the world?

A Western traveler visiting the metropolises of developing countries is immediately struck by persistent contrasts. Tourists visiting Egypt may be just as impressed by the overpopulated and unkempt alleys at the base of the Sphinx as they are by the pyramids. Our images of Egypt are at once real and deceptive.

If Egypt could grow at the traditional growth rate forecast for Asia (7.5% per year), it would take less than 15 years to eliminate half of the present gap in the standard of living between it and Europe. As a result, around 2025 Egypt would have made up three-fourths of the gap. Obviously, a similar narrowing of the gap cannot reasonably be expected by any poor individual living in a rich country, or for his children or even his grandchildren.

For a long time, the comparisons of income levels between rich and poor countries have underestimated, sometimes to a considerable extent, the income of poor countries. For example, the task of a hairdresser working in a developing country is fundamentally no different from that of a hairdresser in a rich country.

For a given task, an Egyptian barber will make considerably less money than a Parisian barber — even if they both do the same work — simply because his clients are poor, and his own professional alternatives are not as promising.

But let us now reverse the argument: If a haircut costs one-thirtieth as much in Cairo as it does in Paris, it follows that in reality the purchasing power of someone living in Cairo is far greater than it seems. He earns less (in dollars), but a substantial number of local goods (haircuts, various other services, rent and so on) are less expensive.

To establish a reasonable comparison between the income of poor countries and that of rich countries, we must therefore reevaluate — sometimes to a considerable extent — all activities that are not tied to world trade. When calculating the income of poor countries, we now must include the additional amount corresponding to the cheaper local goods.

After such reevaluation, we are left with a radically different picture of wealth in the world. According to traditional methods of calculation, rich countries — which account for a little less than 20% of the world’s population — earn close to 80% of the world’s wealth.

However, according to our new method of calculation, rich countries and poor countries each earn approximately half of the total wealth. It is a coincidence that this partition is not very different from what can be observed within rich countries themselves. For example, in the United States and in Europe, the wealthiest 20% of individuals generally earn between 40 and 50% of the aggregate wealth.

Consequently, as in the poor countries, the remaining 80% must be satisfied with the other half of the wealth. Given these figures, we can predict that inequalities in income levels within countries are most likely more acute than inequalities in the world at large. What we might call “the great hope of the 21st century,” namely a convergence of incomes throughout the world, is already underway.