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