A new ‘median’ inequality indicator, designed to support poverty eradication

Inclusive Economy,Poverty & Inequality23 Apr 2013Andrew Shepherd, Amanda Lenhardt

For a national policy maker it is possible to think about raising the income levels of the bottom 10% or 20% toward the middle of the distribution. The poorest can be brought nearer the poverty line through measures like cash transfers.

There is talk of having a post 2015 goal on reducing inequality, an excellent thing in itself, though one which will be very challenging to get countries to agree to. Emerging from the UN Inequalities consultation, a recent proposal for an Inequality Goal by Lars Engberg-Pedersen (at DIIS, Copenhagen) uses the Palma ratio, which compares the bottom 40% to the top 10% (see Cobham & Sumner, 2013). The proposed target/indicator is to: Nationally – halve the Palma ratios which exceed one by 2030 Globally – reduce the Palma ratio by 25% by 2030

Even without an inequality goal, it would be good to monitor disparities going forwards, since they affect the speed of progress towards poverty eradication as well as the nature of societies and degree of social cohesion. Inequality has been a cross cutting issue in most of the UN post 2015 consultations, and there are multiple inequalities which it is relevant to track.

In the current MDG framework we have the following indicator: share of poorest quintile in national consumption in goal 1 but this was never used. The 2012 Millennium Development Goals Report, though making a strong case that inequalities in human development outcomes are preventing progress for the poorest, does not mention the consumption quintile measure.

What are the (political) pre-conditions for getting attention paid to income inequality? Probably that a government is firmly rooted in an institutionalised political party with many members at the poorer end of the distribution, or in a mass movement or social movement. But none of these are guarantees. Globally, it would seem as though there is currently some momentum behind the idea.

This proposal is a revision of the underutilised quintile measure. It suggests measuring the income shares of the bottom 20%, 10% and 5% against the median. This measure is also proposed as an indicator for inequality in other human development outcomes.

This proposal may seem a weaker measure of inequality than the Palma since it removes the spotlight from the rich. But from both a political, and a policy perspective, by including a goal that segments the groups whose fortunes and outcomes are of concern, and by comparing these to realistic outcomes (the median), a framework can be built around objectives that both lend well to adoption across all political contexts, but more importantly that suggests policy measures that can be put in place to address the issues that lead to the persistence of inequality – namely the marginalisation of particular segments of societies.

The disadvantage of the Palma is that the resulting ‘map’ of the income distribution is highly dependent on what happens at the top end – to the richest. Income shares are more variable at the top end of the distribution, so tracking progress on this basis could be misleading. His his blog post, Ricardo Fuentes called the Palma an income concentration measure rather than an inequality measure.

While the dynamics of inequality are certainly dependent on what proportion of income the richest hold, from a policy perspective this offers few indications of what there is to be done to tackle the negative impacts of inequality on the poorest, other than tax and limit the incomes and wealth of the rich. Comparing the poor to the richest can be useful from an anti-poverty policy point of view if it generates or supports a debate about taxation of the rich and the need for redistribution. But it does little to get decision makers to focus on what needs to be done for the poor or the poorest.

A further disadvantage of the Palma is its focus on the bottom 40% since the fortunes of the bottom 5%, 10% or 20% can be very different to those nearer the middle (Shepherd & Lenhardt, 2013; Milanovic 2012). Taking Brazil as an example, the Palma (figure 1) tells us that inequality has decreased since 1981, yet if we zoom in on the income distribution of the bottom 40% (figure 2) we see that although there has been positive change to the proportion of national income going to the ‘bottom’, much of this change can be attributed to gains by those lying between 20-40% of the income distribution. If we zoom in one step further and compare the distributions of the bottom 10% we see that the poorest of the poor have in fact seen very minimal changes in their income shares. Table 1 supports this by showing that while proportions of income are indeed moving ‘downwards’ in Brazil form a high point of inequality in 1989, for the poorest of the poor this is happening at nearly two thirds the rate of other income groups.

The median inequality indicator should at least sit alongside the Palma, since they have different rationales.

Table 1: Change in income share by income disaggregation – Brazil

Income Distribution 1989 2009 Relative change
Bottom 40 % 6.95% 9.98% 43.60%
Bottom 20 % 1.99% 2.85% 43.22%
Bottom 10 % 0.60% 0.77% 28.33%

So, in order to avoid the distortions of the Gini (which does not focus on the extremes of the distribution) and the Palma, and from an anti-poverty policy maker’s point of view, it is proposed that the post 2015 framework should systematically review for all goals the gains of the bottom 10% and 20% compared to the median, which is likely to be a better indicator of what might be achieved over time. Given Milanovic’s work on the bottom 5%, it might be worth including 5% too.

For a national policy maker it is possible to think about raising the income levels of the bottom 10% or 20% toward the middle of the distribution. The poorest can be brought nearer the poverty line through measures like cash transfers. Agricultural and nonfarm economic development, asset building, micro-finance, strategic urban development, support to migration are all mechanisms to improve the fortunes of the second quintile. By building the capacities of the poorest, and by creating opportunities for broader participation in existing social, economic and political spheres for all, sustainable solutions to inequality begin to look possible.