## Monday, 6 June 2011

### A graph is worth a thousand words

Tim Worstall at the blog of the Adam Smith Institute points us to this graph.

The graph comes from a new book "The Haves and the Have-Nots", by the World Bank economist Branko Milanovic, which is about inequality around the world. The graph shows inequality within a country, in the context of inequality around the world. It can take a bit of time to get your heard around it but it is worth it. Worstall writes,
A little background. Branko Milanovic, from whom the data comes, is a researcher into inequality. He tells us that there are three ways of measuring this globally. We could use the average income of each country and then compare these averages, this is Concept 1. Not all that useful as we're thus comparing the 400,000 people of Luxembourg as one unit with the 1.3 billion of India as one unit. Concept 2 takes these averages and then weights them by population. Thus we transform the 50 ish units representing the 900 million of Africa into something we can compare to the 1.3 billion of India. Concept 3 is much more difficult to calculate but is much more informative: treating the world as one unit and comparing incomes across the world.
What happens when you use method 3? In the graph the population of each country is divided into 20 equally-sized income groups, ranked by their household per-capita income. These are called "ventiles" and of course each "ventile" translates to a cluster of five percentiles (see the horizontal axis). Since the cost of goods varies from country to country, household income numbers are adjusted for purchasing power, i.e. income is show in PPP dollars. In other words, the graph adjusts for the cost of living in different countries, so we are looking at consistent living standards worldwide (as best we can). On the vertical axis, you can see where any given ventile from any country falls when compared to the entire population of the world.

Consider, for example, Brazil. Brazil's bottom ventile - the poorest 5 percent of the Brazilian population - is as poor as anyone in the world, registering a percentile in the single digits when compared to the income distribution worldwide. Meanwhile, Brazil also has some of the world's richest, as you can see by how high up on the chart Brazil's top ventile reaches. In other words, this one country covers a very broad span of income groups.

As for America, notice that the entire line is in the top portion of the graph. This tells us that the entire country is relatively rich. In fact, America's bottom ventile is still richer than most of the world: That is, the typical person in the bottom 5 percent of the American income distribution is still richer than 68 percent of the world's inhabitants. Now compare the U.S. to India. India's poorest ventile corresponds, not surprisingly, to the 4th poorest percentile worldwide. But India's richest 5% are only in the 68th percentile. So yes, what this says is that America's poorest are, as a group, about as rich as India's richest.

So being poor in the evil capitalist U.S. is better than being rich in most of the world. Not a result, I'm guessing, too many people would have picked.

It would be cool to see more countries on the graph. What would New Zealand's curve look like?