# **VI.   CONCLUSION**

By combining as many national household surveys as possible, this paper has studied the distribution of consumption expenditure among all individuals in (developing) East Asia. It thus complements analyses of inequality that are typically focused on inequality among individuals within the same country. The East Asian Gini index increased by more than 4 points (or almost 11%) between 1988 and 2012. The increase in inequality has been most pronounced during the initial decade (between 1988 and 1997).

Regional inequality can be decomposed into differences among individuals residing in the same country, and differences between countries. The within-country component has increased over this period, driven by increasing national inequality in some populous countries – China initially and Indonesia a decade later. On the other hand, differences between countries have declined, i.e. average incomes have converged across countries. This can be explained by the rapid growth in China closing the gap with the regional average income, which counteracted the inequality-increasing effects of some lagging countries such as the Philippines. China thus had both equalizing and disequalizing effects on East Asian inequality, through its growth in average consumption and national inequality, respectively. But the rapid growth in average income dominated, thus leading to a net equalizing effect.

As a result of these changes, the share of regional inequality that is explained by within-country inequality increased from two-thirds to close to 90%. At the global level, there has also been an increase in the within-country share, but at a much lower level – it increased from 20% to 35% over the same period (World Bank, 2016). Therefore, the situation within East Asia is already very close to an internalization of regional inequality within countries, in contrast to the global level.<sup>24</sup> However, in the most recent period (2007-2012), which spans the Great Recession, regional inequality appears to have fallen slightly, consistently across different inequality measures. For the first time, the level of within-country inequality has stopped increasing, or might have even fallen slightly. But it is important to point out that there are at least two reasons why our data might be underestimating levels and increases in within-country inequality.<sup>25</sup> First, household surveys tend to underestimate top incomes. The limited evidence that is available for the region suggests that top incomes might be rising quickly in recent years (Lakner and Ruggeri Laderchi, 2017). Second, our use of consumption expenditure might underestimate living standards at the top. The rising national savings rate in China (Ma and Yi, 2010) suggests that inequality in incomes would have increased faster than in terms of consumption. Therefore, while our results are robust to a number of methodological checks, we leave (at least) two important issues for future research and caution that the recent trend reversal should be interpreted carefully.

> 24 Bourguignon (2015) and Milanovic (2016) write that if the trends of falling between-country and increasing within-country inequality continue, one could get a situation where within-country inequality accounts for global inequality entirely, i.e. global inequality becomes “internalized” within countries. This would resemble the pattern of global inequality in the early 19<sup>th</sup> century (Bourguignon and Morrisson, 2002).

> 25 The effect on between-country inequality is a priori ambiguous.

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