Inequality is not only about poverty

Inclusive Economy,Poverty & Inequality29 Apr 2013Lars Engberg-Pedersen

The global development framework for the coming years cannot ignore global inequality if it should constitute a relevant and legitimate set of development goals in a globalised world.

The interest in inequality in the context of a post-2015 development framework is growing rapidly. There are many different dimensions to the discussion. One is to what extent gender equality, discrimination based on other social characteristics than gender and economic inequality should all be included. Another has to do with how issues of inequality should be included: As indicators of progress of the poorest across all development goals and/or as a separate goal. A third dimension has to do with how to measure economic inequality if that should be included.

Regarding the last dimension there is some disagreement about the usefulness of the Palma as discussed in the blog contributions here at The Broker. The Palma measures the income share of the richest 10% to that of the poorest 40% (Palma 2011; Cobham and Sumner 2013). It has been criticised for a number of things:

1. It directs attention to the richest 10% whose income may fluctuate making a significant impact on the Palma, while the bottom 40% do not necessarily experience any change of their income share. Thus, the Palma may go down without the poorest experiencing any progress.

2. The Palma does not say anything about changes within the group of the bottom 40%. The income share of the poorest 10% may fall while the little less poor gain.

3. The Palma does not say anything about what happens within half of the population constituting the ‘middle class’ between the richest 10% and the poorest 40%. Inequality within that group may decrease or increase, but the Palma is unaffected.

4. The Palma increases if the poorest 40% increase their income share and the top 10% increase their share even more. Given that the bottom 40% have improved their share of national income, an increase of the Palma is misleading.

Yes, the Palma is a simple measure that does not capture everything there is to be said about income inequality. However, much of the criticism is based on the assumption that an inequality measure should be directly related to poverty reduction: When the indicator of inequality goes down, it should reflect a reduction of poverty and vice versa.

As Ricardo Fuentes-Nieva notes in his blog ‘we need to think harder about what we want to measure’. It is evidently necessary to go beyond national averages and look at the poorest and how they fare on income and welfare indicators. A major step forward in a set of post-2015 development goals would be to focus on the situation of the poorest across all goals. For instance, a decrease of under-5 mortality rates among the poorest should be a central concern. In this context, Amanda Lenhardt’s and Andrew Shepherd’s proposal of measuring the gains of the bottom 10% and 20% compared to the median for all future development goals is fine. This is an important way of measuring poverty reduction.

Yet, inequality between the richest and the poorest is something different and needs its own goal. First, it is fairly well documented that strong income inequality inhibits the likeliness of growth leading to poverty reduction. Secondly, it seems to limit growth itself. Thirdly, it may produce social unrest and environmental degradation. Fourthly, income inequality in rich countries negatively impacts also on the well-being of the richest (Pickett and Wilkinson 2009). Fifthly, extreme income inequalities do not reflect a ‘result of entrepreneurship and merit’ – Fuentes-Nieva’s term for ‘good’ inequality – but largely a result of one’s native country and the income class of one’s parents – two factors that you cannot influence (Milanovic 2009). While some inequality may help produce incentives to invest additional effort, most of today’s inequalities stiffen the potential of the majority of the world’s population because opportunities are unevenly distributed. Most of the world’s top 10% owe their wealth to pure luck: they were born in a rich country and had rich parents.

Given the devastating effects of strong income inequality, it is only good that the Palma directs attention towards the rich (criticism 1). In today’s affluent world, a reduction of the income share of the richest 10% is in most cases positive even if the poorest 40% do not gain. Furthermore, changes of the income distribution among the 50% not captured by the Palma (criticism 3) are not likely to affect the above issues dramatically. Redistribution within the middle class is not central.

Criticism 4 highlights a rare situation as discussed by Alex Cobham and Andy Sumner in their response to Fuentes-Nieva. Moreover, it links the measurement of inequality directly to poverty reduction which it should not if we want to address the many bad consequences of high levels of inequality.

The inability of the Palma to inform about changes within the bottom 40% (criticism 2) is important though it is linked to the concern with extreme poverty. For this reason some would probably suggest a comparison of the top 10% with the bottom 5, 10 or 20%. This would pinpoint the most extreme inequality. However, it would also limit the measurement to a minor part of the population. The Palma has the advantage of including half of the population based on the observation that the other half (‘the middle class’) captures approximately half of the national income in very many countries (Cobham and Sumner 2013). The interesting difference across countries is accordingly the relationship between the top 10% and the bottom 40%.

How, then, could a separate goal aiming at less income inequality be constructed? In a short piece, I have proposed to take a point of departure in the observation that comparatively equal societies have a Palma of approximately 1 while the Palma in unequal societies amounts to, say, 4 or even 7. The suggestion is that all countries should halve the part of their Palma exceeding 1 by 2030. Such a target calls for the largest reduction of inequality where it is most extreme, and it does not impose an absolute target that all countries should reach irrespectively of their starting point. Moreover, the target is realistic in the sense that some countries already have a Palma of 1.

The problem is to integrate global inequality into the discussion. It has been argued that the global Palma is approximately 32 – the world’s richest 10% earn as a group 32 times the collective income of the world’s poorest 40%. The political instruments – taxation, social services, etc. – to address income inequality at that level do not exist. Yet, a global development framework for the coming years cannot ignore the issue if it should constitute a relevant and legitimate set of development goals in a globalised world.