# **II. Within-country inequality around the world**

The analysis so far has treated the entire world as a single unit. By contrast, most studies of inequality focus on within-country inequality, which remains the level at which most policies to address inequality operate. There is another reason to emphasize within-country inequality: Some commentators have used the evidence on falling global inequality to dismiss concerns with rising within-country inequality for instance in the US. However, countries remain the relevant level for most concerns over inequality; in fact, studies show that wellbeing can be affected by very localized inequality.<sup>13</sup> As the country decomposition in Figure 2 showed, the majority of the world’s population lived in a country where inequality was increasing between 1988 and 2008. In such an analysis every country is weighted by its population, so this conclusion does not imply that inequality increased in the average country. It is important to clarify this because trends can be different whether or not population weights are used. I will briefly review the trends in within-country inequality for all countries in the world, before discussing the trends in Latin America, East Asia and Sub-Saharan Africa in more detail. At the end, I present the most recent numbers on the developments since the onset of the Great Recession. Throughout this section, I concentrate on within-country inequality (typically measured by the Gini index) without using population weights. I will draw mostly on the reviews by Alvaredo and Gasparini (2015) and Morelli et al. (2015) as well as new up-to-date calculations based on data from World Bank (2016c).<sup>14</sup> In the _average developing country_ , national inequality increased during the 1980s and 1990s, while it declined in the 2000s (largely driven by countries in Latin America). By contrast, the _average person_ in the developing world (i.e. using population weights) lived in a country with steadily increasing inequality between the mid-1980s and 2010 (driven by the surge in China and more recently India). Despite the recent fall, inequality remains at a higher level than during the 1980s, and is substantially greater in the developing than the developed world. The overwhelming majority of developed countries experienced increasing inequality since the 1970s.

The decline in average inequality among developing countries in the 2000s was largely driven by the encouraging developments in Latin America, which have been widely documented (e.g. LopezCalva and Lustig, 2010; Lustig et al., 2013). This can be explained by a large number of factors, which certainly include more stable macroeconomics, the growth of low-skilled wages (Cord et

> 13 In the US, Luttmer (2005) finds that an increase in neighbors’ earnings reduces reported happiness after controlling for individual income, where the spatial unit has 150,000 residents on average. By contrast, in Malawi such relative concerns are not the dominant concern, except for the better off (Ravallion and Lokshin, 2010).

14 There are notable differences between these three sources, so they need to be compared carefully. World Bank (2016c) is also the data source used by Alvaredo and Gasparini (2015). However, Alvaredo and Gasparini cover only developing countries and adjust for differences between income and consumption surveys. Morelli et al. (2015) cover only rich and (some) middle-income countries, tend to use equivalence scales, and a mix of primary data and secondary sources. My updated calculations based on World Bank (2016c) (see Figure 4) cover all income groups and mix per capita income or consumption without any adjustment.

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