Skip to content

Poverty and Shared Prosperity 2016: Part 4


Just picking up where I left off yesterday.

This week, I’m posting highlights from and commentary about the World Bank’s inaugural Poverty and Shared Prosperity report. Now, I am on Chapter 4: Inequality!

Four basic facts about global inequality are produced up front:

  1. Global inequality increased from the Industrial Revolution through the 1980s.
  2. Global inequality has been falling since the 1990s, and especially rapidly since 2008.
  3. In spite of the recent reduction, global inequality is wider today than in the 1820s.
  4. Income convergence among countries like India and China is responsible for most of the recent reductions in global inequality.

The report notes that its thematic focus on inequality is in large part due public interest in the topic. Inequality is obviously a hot-button issue these days, and has been since the financial crisis brought it to the forefront. (The Occupy movement certainly deserves some credit here, as well.)

Of particular interest here:

This report examines inequality because of this instrumental concern, but also for intrinsic reasons. Individuals express concern with rising inequality, broadly defined. In fact, their perceptions of increasing inequality—even though objective measures of inequality declined—have been argued to be one of the factors contributing to the Arab Spring. Furthermore, evidence from experimental studies suggests that individuals do not act exclusively in a purely self-interested manner, but often reveal a deep-rooted concern for fairness in outcomes. Leveling the playing field, that is, reducing inequality of opportunity, therefore relates to notions of fairness and justice and resonates across societies on its own merits.

Inequality of opportunities remains an ongoing concern if only because limited opportunities harm the economic progress of future generations. Poor opportunities being self-reinforcing, gradually marginalizing large swaths of people and keeping them trapped in poverty. Expanding such opportunities, especially to the poorest, is essential to future growth.

The World Bank endorses government policies which seek to narrow income equality and expand income-earning opportunities. Government interventions can be more efficient and effective where markets are lacking or nonexistent. (I’ll note that the implication here is that government is inefficient if it’s meddling where markets are extant and relatively robust.)

While the report does, at turns, endorse redistributive policies, it also suggests that the evidence for negative growth impacts caused by income inequality is scant and inconclusive. It is then suggested that inequality of opportunity is the real bugbear here, rather than inequality of results. To put it another way, it makes more sense to address inequality by offering more economic opportunities to those who need them, rather than rely on attempting to correct such inequality on a post-market basis (such as by collecting taxes and giving them to the poor).

The data also shows that growth tends to follow a mean distribution. As a country’s economy grows, that growth is generally shared across the entire population, including the bottom 40%. At least, this is what data from 121 countries indicates. But imagine incomes grew 10% on average in a particular country over a 10-year span. Someone making $200,000 a year is now making $220,000 a year. Someone else making $1000 a year only sees $1100 now. The wealthier person saw $19,000 worth of income increases that the $1100-a-year-person did not. The income gap between them remains the same in proportional terms, but has grown considerably in absolute terms.

Note here how the report makes clear that it’s not simply reliance on markets alone that will make the 2030 goals achievable:

Including the less privileged in the process of growth and investing in their human capital may also be good for growth. For example, removing credit constraints on the poorest and the bottom 40 and developing insurance mechanisms for them are expected, respectively, to lead to higher growth through productivity gains and to limit the impacts of natural disasters on economies. Improving the human capital of the poor by promoting early childhood development (ECD) and good-quality education; investing in infrastructure that connects, for example, smallholder farmers with markets; and enhancing the coverage and quality of electricity services have been shown to have positive effects on economic growth, while improving the living conditions of the poor (see chapters 5 and 6). Policy choices and economic growth from now until 2030 will continue to affect the pace of sharing prosperity and ending poverty. If these choices are made smartly, and economic growth is strong and sustainable, the twin goals of the World Bank will be within reach.

This theme is consistent. Government intervention is essential for giving the poor a leg up to access better economic opportunities and improve their incomes. And while inequality may not in itself hamper growth, it does damage societal cohesion, which is necessary to long-term stability and that stability is, in turn, necessary for poverty reduction.

As for the trajectory of inequality in the industrialized West, the US appears to be an outlier with its high (and growing) levels of inequality over the long term. France and Japan, for instance, now see their top earners control a much smaller share of the national income than they did a century ago.

What we can also see is that inequality has varied dramatically even over the past few decades, from country to country. It has risen in some, fallen in others, and fluctuated back and forth in still others. The economic and political forces behind these shifts are not, it seems, well understood–there are likely too many variables involved to determine what, specifically, causes one country to have less inequality than another.

The rest of this chapter attempts to systematically measure inequality through consumption patterns rather than income, since what households consume is likely to be a much better indicator of their buying power than income alone. It does give the caveat, though, that consumption declines at the top relative to income (i.e. rich people will save at a much higher rate than poor people because they have more money to save) and so inequality is probably understated. Really, there are multiple measures on which the report admits that inequality is likely understated. It makes me wonder how it can downplay the significance of inequality so much, then offer measures that lowball such inequality, knowing that most journalists are just going to grab the graphs that, in essence, make it look like inequality is not so bad. People are always going to gravitate more toward charts than the explanations for why those graphs may understate the case.

If they have so little confidence in their measures of inequality, why even report them? It strikes me as deceptive or at least thoughtless. About the most positive conclusion that can be drawn from the data presented is that, broadly speaking, inequality increased through the 1990s and early 2000s and then declined slightly since 2008. This is good news but is pretty much just damning with faint praise. I recommend looking at the charts and graphs yourself–there are a lot of them and they offer a lot of information, albeit with many caveats.

It’s also entirely possible that declining inequality is actually a result of the global financial crisis–that the richest losing much of their wealth resulted in less inequality, but there was no corresponding rise in the fortunes of the poor. It’s also worth noting that, by this point, the world’s wealthy have largely returned to their previous incomes, and there is a 3-year lag in the data here.

This chapter concludes with the following statement, claimed to be backed up by the subsequent chapters:

Beyond global processes, a country’s income inequality is also a choice. Domestic policy choices explain, to a large extent, recent within-country inequality reductions, often combining solid macroeconomic management with coherent sectoral policies.

We shall see!