Why is global inequality so big?

Two great recent papers illuminate global inequality. First, Branko Milanovic estimates that global inequality is even bigger than previously thought.
Second, Charles Jones explains why, in a brilliant paper (pdf). It's all about weak links, complementaries and superstar effects, he says.
Inadequacies in the production of intermediate goods, he says, can lead to poverty traps. For example, unreliable electricity generation reduces the output of the rest of the economy, which leads to a lack of finance with which to build generating capacity.
Also, inputs are complementary. If you want to build a sock factory, you need machines, adequate workers, electricity, fibres, transport to markets, management nous and protection from theft and corruption. The lack of any one of these can hold productivity down disastrously, perhaps even to zero. There's an analogy here with the Challenger space shuttle disaster. The failure of a cheap rubber ring destroyed a multi-billion dollar investment.
What's more, fixing any one inadequacy might do no good if others remain - just as there's no point fixing just one weak link in a chain of many weak links. This is perhaps why so many efforts to help developed economies have failed.
Thirdly, rich and poor countries have differences in the elasticity of substitution. Imagine two nations have bad transport networks. In a rich country, many of us can get round this by working from home. This makes us richer, by encouraging us to substitute away from a low-productivity sector towards high-productivity ones.
In poor countries, by contrast, there are complementarities between transport and other economic activities, so productivity is held down, perhaps to the lowest level possible; in extremis, if you can't travel to market, you have no option but subsistence farming.
In these ways, small differences between economies can multiply to produce huge differences in incomes. Countries, as well as people, can benefit from superstar economics.

Comments

[Keith]

On a technical level, what you say seems very true and that is useful because it gives managers a big clue about how to make things better. However, the real underlying reason is surely the greed and selfishness of those who have already got wealth. This, many may argue, is an unavoidable consequence of human nature, so not very useful to point it out (yet again). However, I contend that human nature is first and foremost adaptable to its environment. In a world that promotes competitive acquisition (like the present one), people are trained to be nasty. We could, as a matter of policy, promote empathy and care for one another - leading (I contend) to a more humane human nature. It's our choice.

[Scott Hughes]

That is very interesting. I wonder how bad economies can be made more productive. Were they always like this? It seems like a lot of people in the world were better off before the West industrialized. Why is that?

[Patrick, London]

The vast majority of the difference between rich and poor nations can be ascribed to culture and attitude towards hard work. Read David Landes book 'The Poverty and Wealth of Nations'.

A little example. Last week was my daughter's birthday party. We shared the party and venue / entertainer with another one of her classmates - who happens to be an Arab girl. My wife and I did basically all the work, all the preparation and all the cooking and decorating. Such effort as was put in by the other family was all done by the mum. Father invisible. How will the Muslim world really become internationally competitive with a rent seeking attitude to work? When the oil age is over they're stuffed.

[kio]

I agree with Keith. The nature of humans is the only reason for the observed inequality. I would not blame the nature, however, because many natural objects and processes are constructed in a way leading to the same size (income) distribution. In the nature, this is the result of energy exchange and dissipation. One can not construct a matter with all electrons having the same orbit, some should have smaller some - higher energy. Same is observed in human society. Everybody has to find some income taking it from the outer world. So, everybody has to make decision on that place s/he wants to obtaine in the income distribution and fight. The number of slot for given income is limited by the overall distribution. Bad thing is that you can not invite extra person to your level of income - just to exchange positions with lower incomer. Therefore, this is everyday decision of each and every person on the fairness of the current income distribution and everyday fight for own place what stabilizes the distribution itself. It is as it is and only altogether we can change it by some enforced agreement on fair redistribution of income. (I do not think it will happen.)

As a conlusion, remember that it is your everyday decision that other people have to have lower income than you have makes the poverty. Nothing else.