Gini, Palma and the median inequality indicator – Sub-debate on measuring inequality

Inclusive Economy06 Dec 2013Sara Murawski

Inequality indicators play an important role in the process of choosing the post-2015 goals. Related to this issue is the question of what level of inequality is acceptable – a certain amount of inequality can stimulate economic growth, but too much has many detrimental effects on society.

In their contributions to The Broker debate on inequality, Stephan Klasen and Martin Ravallion argued against the inclusion of an explicit inequality goal, because it is too difficult to decide upon a ‘good’ level of inequality, and thus to what extent it should be reduced. Ricardo Fuentes-Nieva however refuted this standpoint by stressing that the difficulty of measuring inequality should not be seen as a reason to exclude inequality targets from the post-2015 agenda. In his words, “dodging the issue in the post-2015 agenda because it’s difficult to know the desirable level of any indicator is akin to eating your way through obesity just because you don’t know your perfect weight.” For Fuentes-Nieva the post-2015 process is as an opportunity to put inequality explicitly on development agenda, targeting mid-term inequality reduction goals.

Given the growing body of evidence on the relationship between high rates of inequality and its impact on social mobility and equality of opportunities, Fuentes-Nieva argued that it is not necessary to opt for only one indicator of inequality. He considered the Palma index an interesting indicator of income inequality. While the Gini coefficient expresses the amount of inequality within a society by aggregating income gaps into a single indicator (a Gini of 100 indicates that all income goes to one person), the Palma index compares the income share of the top 10% to that of the bottom 40%. This does mean that it is insensitive to middle range income distribution (the middle 50% of society generally catches a relative stable share of national income) and expresses income inequality between the two extremes.

Martin Ravallion was critical of the Palma index, arguing that an increase in the bottom share and an even greater increase at the top would raise the index rating, despite the poor being better off. Alex Cobham and Andy Sumner responded to this criticism by arguing in favour of the Palma index. Firstly, they said that Ravallion’s scenario applied to only one country, Burundi. Secondly, they argued that the Gini coefficient does not necessarily provide a ‘better’ reflection of a country’s development than the Palma index. They pointed to Mexico, where the Gini fell by 5%, while the Palma index rose sharply. According to Cobham and Sumner, “it’s extremely difficult to see how the perception given by the Gini’s 5% fall can be defended as any kind of measure of what happened to inequality.” In other words, the Gini index might simply fail to genuinely express the status of inequality in a country.

Amanda Lenhardt and Andrew Shepherd pointed out two problems with the Palma index. Firstly, it is sensitive to strong variations in income distribution at the top. Since top income shares tend to be more variable, the Palma index might present a misleading view of progress in a country. Secondly, they claimed that taking the bottom 40% as a starting point obscures the differences between those at the very end of the income distribution spectrum (say, the bottom 5%, 10% or 20%) and those near the middle. Instead, “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”, they proposed measuring the progress of the bottom 5%, 10% or 20% towards the median for all future development goals.

Lars Engberg-Pedersen welcomed Lenhardt and Shepherd’s method as a way to measure poverty reduction but did not consider it suitable for measuring inequality. In his view, global inequality should have its own goal in the post-2015 agenda and he therefore favoured the Palma index. On the Parma index, the global community as a whole had a score of 32, which means that the top 10% earns 32 times the income of the bottom 40%. Unfortunately, as Engberg-Pedersen pointed out, “the political instruments – taxation, social services, etc. – to address income inequality at that level do not exist.” He correctly argued that the global development framework cannot ignore global inequality if it is to “constitute a relevant and legitimate set of development goals in a globalized world.” The Palma index could offer one way of achieving this.