Tyranny of numbers

Iran’s place in the world distribution of income: an update

Posted in General, Inequality, Poverty by Djavad on December 18, 2011

My post by the same title a year ago that featured a graph developed by Branko Milanovic was the second most visited post on this blog last year (after one on Iran’s energy subsidies), receiving 912 views.  So when I learned last week that he has been working on an update of his analysis of the world distribution of income, I requested an updated graph.   Branko was the keynote speaker at an Economic Research Forum conference that I attended in Cairo, where he was introduced as “Mr. Inequality”. His new results show that Iran’s position in the world distribution of income improved between 2005 and 2008, something that should surprise no one since during this period Iran was the recipient of about $200 billion worth of transfer from the rest of the world as oil income.

I reproduce below the old graph, which was for 2005 and used $PPP incomes, and a new one, which is for 2008 and uses the same base.  The picture for 2008, as Branko would hasten to add, is not yet complete.  So far he has 88 countries in his sample, but plans to increase it to 125.  He does have all the important ones, including China and India, so the new results are definitely worth a look.

Let me first explain what these graphs tell us.  Consider putting together the populations of all countries of the world, the entire 7 billion people into one giant bin arranged by their income or expenditure per day.  The place of each person in this global distribution is marked on the vertical axis.  The horizontal axis measures the position of the same person in her own country’s distribution.  So, for examples, in 2005 Figure 1a shows that the poorest person in the US was at the 60th percentile of the world distribution, the poorest person in Germany at roughly the 78th percentile, and the median person in Iran at about the 75th percentile, and so on.

In 2008 (Figure 1b), the poor in both Germany and the US were doing relatively worse than in 2005, perhaps because of the financial collapse and the Great Recession that started about then. The poorest person in the US had moved down the global income distribution to about the 55th percentile, from 60th.  Moving up were all the developing countries listed in this graph, including Iran and Egypt (Brazil, China and India are not shown in the 2005 graph, but you can look them up in his latest book, The Haves and Have-Nots, Basic Books, 2010).

The interesting feature of the change in Iran’s position is that it appears to have mainly resulted from increase in incomes of Iranians above their nation’s median income.  While the person with median income in Iran has stayed around the 75% percentile, those at the top 10% appear to have moved up quite a bit, joining the world elite at the top 1%.  In 2005 there were no Iranians at the very top, but by 2008 some had secured enviable positions at the top 1% of the world distribution, in good company with the richest Germans,  Americans, and Brazilians.

Figure 1a. The world distribution of income, 2005

Figure 1b. The world distribution of income, 2008

Figure 1b also shows, for 2008, the position of the two fastest growing economies of world, China and India.  There are super rich people in these countries that belong to the top 1%, but they are not included in their income and expenditure surveys because, as all surveys, they have poor coverage of the very top incomes.  As a result, the curves for these countries stay below the 95th percentile.

The difference between living standards in China and India seems more striking in this graph than in GDP per capita.  China’s GDP per capita is about 3 times that of India (and one-fourth of Iran’s).  The distributions here show that, thanks to rapid economic growth in the last two decades, in China a relatively large middle class has emerged (defined loosely as people above the 75th percentile line of the global income distribution).   India’s global middle class is by comparison very small as a proportion of its population, though it is large in absolute numbers.  Brazil is more of a middle class nation than either China or India, with about half of its population with incomes above the 75th percentile.

Iran has an even larger middle class in relative terms, but to be accurate I should note that Iran’s middle class is more a product of rising consumption made possible by rising oil income than rising productivity.   In Brazil, joining the ranks of the global middle class means being as productive as a person in China or Germany with similar income and status, whereas in Iran (and other oil rich nations) it does not mean that at all.  This is why comparisons that some people in Iran make between Iran and with the much (oil) richer countries of the Persian Gulf is so misleading.  The real criterion for international comparisons is productivity, not GDP per capita which includes oil rents (even with the PPP correction).

I believe in some sort of folk theorem of economic and social development, according to which only a productive middle class can play its historic role of reorganizing society in ways that enables its people to live productive lives; that is, building democratic institutions, the rule of law, and so on.   When the rise of the middle class is from the fruits of other people’s labor and human capital, as reflected in higher demand (and therefore price) for oil, which has lately been the case for Iran, it does not have the same effect.  But that is a long story and for another post!

6 Responses

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  1. jbello said, on January 19, 2012 at 1:42 am

    I like what you say in theory, but there is a serious counter story. The US middle class was highly productive in the 50s and 60s, but we didn’t reorganize the government, instead we allowed ourselves to be sold out. And now we do not have a productive economy and our society is in decline.

  2. dan said, on December 29, 2011 at 4:38 pm

    I am also interested in this take on the situation, so from your interpretation of the financial situation of the country at present you see no cause for radical change. In a sense if the upper middle classes can still purchase there Mercedes, Hyundai’s and other high ticket prices items then they do not care for change. Looking at the social aspect of Iranians lives they are very Asian (South Asian) in mentality in terms of lifestyle, similar to characteristics of Indians I find rather than Gulf Arabs. Can we clarify what middle class means in terms of median income in Iran or are we talking more about a social mentality much like western countries?

    • Djavad said, on December 31, 2011 at 7:49 am

      The upper middle class may be satisfied with its consumer goods but not with the restrictions on its social life. But the point I am raising applies to a wider middle class, who are dissatisfied with the economy but the problems the change they strive for is not what middle classes have historically accomplished elsewhere — a more productive economy. Unfortunately, in this respect Iran’s middle class is closer to those in the oil-rich Gulf countries than to its counterpart in India. Lots of economic reforms that have been implemented in India since the 1990s and China for the last 3 decades have been backed by their middle classes, and have drastically raised productivity in these countries. I do not see the same type of focus in the demands of the Iranian middle class, for example in the 2009 elections. I think it may have something to do with rent income from oil.

      Most people define the middle class based on their consumption, such as those with more than $10 per day to spend. The 75th percentile of the global distribution that I suggested in my post roughly equals the median income in Iran, which was about 50,000 rials in 2009, or about $11 in PPP.

  3. willyong said, on December 29, 2011 at 8:41 am

    Very interesting post and congratulations on an informative blog.

    I am especially interested in the distinction you make at the end between the potential for social reorganization arising from a productive middle class compared with that of a middle class arising from rent-based consumption.

    My intuition tells me that the rise of a productive middle class must necessarily be associated with a degree of political power and representation concomitant with the value-adding capability of that class. If the middle class is predominantly a consumer class benefiting from rents, then it is dependent on rent-distributing networks and therefore more conservative in its desire for social reorganization and less capable of forming organizations/institutions to achieve it given competitive, zero-sum rent-chasing.

    Am I far off the mark? I look forward to hearing your views.

    • Djavad said, on December 29, 2011 at 12:14 pm

      Thank you William for your kind words and incisive comment. You are right on the mark. The politics follows in part the disposition of the middle class. There is still political room in Iran for improving productive institutions, but the middle class does not seem all that interested. Their general response to the subsidy reform is a case in point. A productive middle class would more likely support such moves; Iran’s generally did not. I do not see much support for improving the business climate, except to fight corruption, which is important but is not the only issue. Iran’s middle class fought Rafsanjani with charges of corruption when he was trying to improve incentives for investment and production. In my view, the lingering influence of the left on Iranian politics is also explained not so much by a rising working class but a rentier middle class obsessed with redistribution.

      The type of issues that concern a productive middle class is more fundamental than what seems to concern the Iranian middle class. A productive middle class is more concerned about government obstruction of production than how rent is distributed. The public debate on two running concerns in Iran, inflation and equality, is interesting for me. In each case, the effect that is emphasized in on consumption, while the consequences for production are ignored. On inflation, the giveaway is the obsession with rising food prices, which actually helps farmers, the people generally below the median income. Here is a productive sector that is partially protected from oil-financed imports and the middle class pushes the government to open up the import spigots, which it does. On inequality, they are more concerned with outcomes and opportunities.

      I hope to find the time to write more about these issues.

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