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How to measure inequality
SDG 10 is perhaps the most ignored of the Sustainable Development Goals, now there’s a fresh call for the guardians of the SDGs to breathe new life into inequality reduction targets.
Leading economists and experts on inequality from around the globe recently signed a letter to the heads of the UN and World Bank calling on them to act on inequality, and in particular to set targets to reduce it. Some very influential people signed the letter, including the former UN secretary general Ban Ki-moon, New Zealand’s former prime minister Helen Clark and the economists Jayati Ghosh, Joseph Stiglitz and Thomas Piketty. The letter comes at an important moment as the UN do its midterm SDG review and the World Bank plans to update its mission, which includes reviewing its own goal on inequality.
In this week’s Equals Bulletin, we’re looking at the different inequality measurements and what the numbers say about how they differ - put on the kettle, this one is a bit geeky!
How is inequality currently measured by the UN? SDG 10, the goal to reduce inequality, is currently measured using the World Bank’s ‘Shared prosperity’ metric which measures the growth of the bottom 40% vs the whole population. This is useful for tracking the income growth of the poorest but isn’t very useful for tracking the evolution of inequality. Our analysis found that one in five of the countries registering positive Shared Prosperity also saw inequality increase at the same time- countries like Vietnam, where the growth in the incomes of the top 10% has been dramatic in recent years.
Letting the Gini out of the bottle? While Shared Prosperity is blind to what happens at the top, the well-known Gini index effectively measures how far income distribution is from perfect equality. It captures the middle well but not the top and bottom – so more equality in the middle classes would be seen as more positive than more equality between the poorest and richest. This is where another measure of inequality, the Palma Ratio comes in, which is the ratio of the incomes of the richest 10% and poorest 40%. It is more sensitive to big leaps in the incomes of the rich, something all too common these days. It is also simpler to explain and understand. Both are good, and both would be a huge improvement on Shared Prosperity.
How do they compare? The Shared Prosperity measure shows that a narrow majority of countries are progressing, the Gini index on the other hand shows much less progress, especially when the more accurate World Inequality Database (WID) rather than the older Standardized World Income Inequality Database (SWIDD) is used. Using the Palma ratio, just 12% of countries have seen reduced inequality. A stark difference that just goes to show how important it is to use the right measure.
What about wealth? SDG 10 is all about income inequality, but there is ample evidence that extreme wealth inequality is ballooning. Oxfam’s latest inequality report found that over the past two years, the richest 1% bagged nearly twice as much wealth as the rest of the world put together. If we compare the global average Gini and Palma ratios, it is clear that inequality is even worse for income than wealth. Given wealth inequality fuels income inequality (ownership of stocks for example can create new income through dividends), fighting wealth inequality should arguably be the priority.
The Uncounted Rich. What is universally agreed is that the data on inequality is very poor indeed, and in particular the incomes and wealth of the richest are very poorly recorded. Household surveys are the centre of the World Bank numbers, and rich people basically don’t fill in surveys. Thomas Piketty and his team have pioneered the use of tax and other administrative data to give better estimates of top incomes, but even this is limited. The rich, as we know, are as good at avoiding tax as they are at avoiding surveys. A huge investment in better inequality data is essential which was one of the key asks of the signatories to the letter.
Global inequality. The pandemic saw both income inequality (measured using the Gini) and poverty increase sharply for the first time since WW2. The incomes of the poorest 40% of global citizens fell twice as much as those of the top 40% in 2020. This is mainly because rich countries had the financial firepower to protect jobs, pay premium prices for vaccines and prop up financial markets. One of the knock-on effects has been spiralling debt in low and middle-income countries, which we did a bulletin about a few weeks ago.
Read the joint DFI, Pathfinders and Oxfam briefing paper which goes into this all in more detail.
Scope for hope
Pathfinders have created an Inequality Solutions portal, jam-packed with details of policies from around the world that are in place and helping to fight inequality.
Something to read
Economist Jayati Ghosh one of the signatories to the UN/World Bank letter makes the case for using the Palma ratio to measure inequality and improve data collection.
“I used to ride private planes. Now I’d rather get arrested protesting them” Abigail Disney on why the rich should ditch their private jets.
Anthony Kamande’s blog on “How the United Nations and the World Bank can turbo charge the effort to reduce Inequality”