As briefly described in the methodology section, the demographic shifts and economic changes simulated with the CGE model are used to “shock” individual household incomes and a new counterfactual global income distribution for 2030 is estimated.<sup>13</sup> By comparing the simulated and the initial global income distributions, one can infer the importance of China and India in explaining some of the key changes in the global distribution as the reduction of global inequality and the emergence of a global middle class.

# 4.1 Global Income Inequality

If the world were a single country, it would be one of the worst distributed,<sup>14</sup> with a Gini coefficient of 0.68 (see Table 2), well above the world’s simple average of 0.39 and the population-weighted average of 0.35. The fact that global inequality is higher than the inequality level within most countries is explained by disparities in average incomes _between_ countries. This is also clear from the results of two different population decomposition<sup>15</sup> exercises: (1) defining the subgroups as countries, and (2) defining two subgroups, China and India versus the rest of the world. The results show that a measure of international inequality based on country’s average incomes, completely ignoring within-country differences in incomes, would capture three quarter of total global inequality in 2000. In other words, eliminating all within-country income differences would bring global income inequality down by 25 percent. In a second exercise the world’s population is partitioned in two subgroups, one containing the populations of China and India and the other one with citizens from the rest of the world. This decomposition shows that in 2000 comparing average incomes of the China and India group with average income in the rest of the world (RoW) would be enough to capture 18 percent of total income inequality (Table 2).

The importance of China and India gets much larger when considering changes between the 2000 and 2030 global distributions. By 2030, the Gini for the global income distribution is 5 points lower than its level in 2000. According to the decomposition results, the reduction in inequality between 2000 and 2030 is entirely accounted for by a reduction in disparities in average incomes across countries. Since reductions in average incomes differentials are weighted by population, _a rapid growth of poor countries like China and India can have a great impact on global inequality_ .

> 13 It is worth noticing that the results of our model are not a forecast of future income distribution; the GIDD creates, within a global CGE-microsimulation framework, a hypothetical income distribution accommodating assumptions regarding the future rate of population growth, human capital accumulation, sectoral allocation and GDP growth (see Bussolo et al, 2007).

> 14 Only Haiti with a Gini coefficient of 0.71 showed more inequality than the world as a whole in 2000. 15 A simple way of evaluating the importance of differences in average incomes between countries versus differences in incomes within countries is to undertake inequality decomposition by population subgroups. A subgroup decomposition exercise separates or partitions the population (in this case the world population) into mutually excusive groups and assesses how much inequality is accounted for by difference in incomes between groups versus within these groups (Mookherjee and Shorrocks, 1982). The importance of a particular characteristic determining the partition rule will be captured by the proportion of inequality that can be accounted for by differences in average incomes between groups (Cowell and Jenkins, 1995).

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