Equality, Participation, Transition: Essays in Honour of Branko Horvat

Branko Milanović 67
substantially altered. The line labeled ‘Gini (income alone)’ in Figure 4.4
shows the calculated Gini coefficients that would obtain if income
alone determined inequality. An upward and short bulge in inequality
is followed by a prolonged and slow decrease in inequality as income
levels rise. The Figure also shows that, if income alone mattered, the
differences in inequality between rich and poor countries would be relatively
small. While the standard deviation of the actual GINI in our
sample is 11.7, the standard deviation of the thus calculated GINI is only
3.4 (see Table 4.4). The distance between the ‘Gini (income alone)’ line
and the line obtained from our regression (6) is due, save for the statistical
discrepancy, to the role of social choice variables. The distance
widens around $5000 per capita. For all countries with higher incomes
(except for Hong Kong; see point HK in Figure 4.4), the divergence, and
hence the role of social factors, is substantial. One can therefore propose
two turning points of inequality: the first would occur at the level of
approximately $2100 where, as noted before, the standard Kuznets curve
linking income and GINI begins to turn downward. The second occurs
at around $5000 when social choice variables become significantly more
important than before and reinforce the downward trend in inequality.
The difference between the unweighted Gini based on ‘income alone’
and the actual Gini in the whole sample amounts to 14.3 Gini points
(Table 4.4). This is, therefore, the joint effect of social transfers and
Table 4.4 The role of social choice variables
Level of income (1) (2) Effect of Due to: Due to:
in $ PPP (number GINI Actual social choice: STATE TRANS
of countries) ‘income alone’ GINI (2)–(1)
Under 1500 (14) 56.0 50.7 5.3 2.0 2.4
1500–3000 (13) 58.4 46.0 12.4 3.9 3.1
3000–4500 (11) 57.9 46.2 11.7 6.3 4.9
4500–6000 (14) 56.8 41.2 15.6 8.7 6.5
6000–10,000 (7) 54.7 29.8 24.9 12.0 9.4
Over 10,000 (21) 50.0 31.4 18.6 5.3 12.2
Total (80) 55.0 40.7 14.3 5.8 6.8
Standard deviation 3.4 11.7
GINI ‘income alone’: Calculated from regression (7) by setting STATE and TRANS0.
Effect of STATE and TRANS: Calculated from regression (7) by multiplying the corresponding
coefficients with the actual values of STATE and TRANS. All of the difference in column (3)
is not explained by STATE and TRANS. Some of it is explained by the Asia dummy and some
unexplained because of the discrepancy between the values predicted by the regression and
the actual GINIs.
All values are unweighted averages.