Declining international inequality and economic divergence: Reviewing the evidence through different lenses

In recent years, an ample literature has emerged on the evolution of global inequality during the last two decades. A few stylized facts emerge. If one weights countries by their population, then inequality across countries has declined. However, if one treats countries equally - as in the macroeconomic convergence (divergence) literature - then there has been increasing inequality. Which view is the correct one? In this paper, we use the 2004 version of the World Bank's World Development Indicators to re-examine the evidence over the 1980-2002 period, and the data reaffirm the two trends described above. Even if inequality declined by most common aggregate inequality indices, there is neither full Lorenz dominance of 2002 over 1980 in population-weighted terms, nor first-order dominance. The aggregate inequality indices also mask the tremendous mobility of countries, and in particular, the impoverishment of about two dozen countries at the bottom of the distribution over the period in question. Tracking mobility is a less "anonymous" approach to the analysis, and it also can explain divergent views on increasing or decreasing international inequality. If one cares only about final outcomes and not initial starting positions, then inequality decreased by most criteria. However, if mobility itself is part of the welfare criteria, and if one is willing to put more weight on those countries that have lost, then the world distribution of income has worsened.