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Measuring inequality: different methods, different outcomes

There are several ways to measure inequality. Generally, three main methods can be distinguished:1

  • Within- or intra-country inequality, which addresses income inequalities within a country;
  • Between-, cross- or inter-country inequality (also referred to as international inequality), which compares income differences between countries;
  • Global inequality, which encompasses both within- and between-country inequalities.2

Within-country inequality compares the differences between households or individuals. International inequality is based on a country’s mean GDP/GDI per capita, but ignores internal inequalities between inhabitants. It can take account of the population of a country, but not necessarily.3 This is relevant for the outcomes of inequality surveys. Take for example, again, the case of Latin America: although overall inequality decreased in the first half of the 2000s, it is important to point out that Brazil and Mexico, which account for 56% of the total population, experienced stronger income convergences than the other countries;4 Venezuela, Bolivia and Uruguay, by contrast, experienced an increase in inequality.

On a global scale, international inequality has been falling since the 1950s.5 One of the main reasons for this is the economic growth of large emerging economies, particularly India and China. If they are left out of the equation, the inequality trend is reversed, with international inequality levels rising from the 1980s and onwards.6 Meanwhile, within-country inequality in both China and India has strongly increased in recent decades, reflecting widening income disparities between the rich and the poor.

Global inequality refers to inequality between ‘world citizens’, comparing the incomes of individuals across the globe. It includes within-country inequality based on data collected from household surveys.7 These data are far more extensive and diversified than GDI per capita, but are only available for the 1980s and onwards. Although global inequality is currently extremely high, it remains unclear how the trend will develop further.8 A recent paper by Branko Milanovic suggests that, between 1998 and 2008, global inequality declined for the first time since the Industrial Revolution.9 However, Milanovic stresses that this trend can only be continued if countries’ mean incomes converge further, and inequality within countries is monitored.

Which inequality standard should be preferred? There is no simple answer to this, since it depends on what you are trying to find out. International inequality is important given the failure of the convergence hypothesis, which argues that poor countries should grow faster than rich countries. But global inequality might be more helpful in understanding recent inequality patterns, which suggest that the traditional distinction between low and middle income countries is disappearing.10 Andy Sumner’s findings that the majority of the poor now live in middle income countries (like India, China, Nigeria, Pakistan and Indonesia), rather than in the world’s poorest countries (mainly in Sub-Saharan Africa) challenge current policies that focus the fight against poverty on LICs.

1ILO, World of work report 2008, p. 8.

2ILO (2008) explains the procedure of measuring global inequality as such: ‘Household budget surveys are used to measure income shares to calculate a precise image of within country inequality. Then, each income share is weighted by the GDP per capita of the country considered in order to calculate the mean income for each income class.’ Footnote 11, p. 82.

3Milanovic, B. (2007) Globalization and Inequality. From: Held D. & A. Kaya (2007) Global Inequality – Patterns and Explanations. Polity Press, pp. 26 - 49, p. 27.

4Guillermo C., L. Gasparini † & L. Tornarolli, (2009). Recent trends in income inequality in Latin America. ECINEQ working paper 2009 – 132, p. 4.

5NPA (Norwegian People’s Aid, September 2012) Inequality Watch, p. 24, in reference to Milanovic (2005).

6NPA (2012), p. 25.

7Held D. & A. Kaya (2008), p. 27.

8Held, D. & A. Kaya (2008), p. 33.

9Milanovic, B. (November 2012) Global Inequality by the Numbers: in History and Now Policy Research. World Bank Working Paper 6259.

10Also see Romay, C. (2012) Is income inequality going up or down? From: NPA Inequality Watch, p. 24ff.

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