A few years ago, Alex Cobham published a great book which was called ‘The Uncounted’ and had a powerful central argument- inequality is much worse than we think, because so much of it is uncounted.
At the bottom, because our data on poverty comes from household surveys, the poorest, the most disenfranchised are systematically missed out. This includes the homeless, indigenous communities, pastoralists. It includes basically anyone who does not have a fixed address or home, which includes the billions living in informal settlements and slums. One estimate from 2015 was that as many as 350 million poor people go uncounted.
At the top, surveys also systematically fail to survey rich people. Rich people are notoriously bad at filling in household surveys, and as a result their incomes are systematically underestimated. They are very few (almost by definition) so quite hard to sample. This leads to very large underestimates- household surveys that give the top average income as being say 50,000 dollars in a country known to have many millionaires and a few billionaires is very common.
One other way to better capture the incomes of the rich is to use tax data. Fortunately, thanks to the innovation of the late Anthony Atkinson, and of course the amazing World Inequality Lab there has been a huge boost in this area of work. Think how instrumental the figures about the growth in the income of the top 1% in the US have been, compared to a discussion of the evolution of the US Gini coefficient. Measures of the income of the top 1% can be as much as 70% higher using tax data. They can show increases in inequality when other measures like the Gini show decreases- this was the case in Brazil.
But tax data is weak for most countries in the Global South, and in every nation, it fails to capture data on income and wealth that avoids paying any tax- and as we know tax dodging by the richest is a really significant thing. One study looked at data leaked from HSBC about rich people in Scandinavia and calculated that the incomes of the richest were 30% higher.
World Bank and UN fail to use most up to date inequality measures This explosion in creativity around accurate measuring of inequality has begun to feed into many national discussions but has yet to have a real global institutional home. In 2013, the World Bank set itself twin goals, on poverty and on shared prosperity, and in 2015, the UN agreed a new goal on inequality, SDG 10. Both use the World Bank created measure of ‘Shared Prosperity’– which looks at whether the incomes of the bottom 40% have grown. It is not great and does not measure inequality in any real sense.
An opportunity this year to strengthen global goals on inequality.
Now this year, at the halfway point of the SDGs, and with a new President Ajay Banga at the World Bank, there is some hope that this could change. A new exciting ‘Save SDG 10’ initiative is bringing together governments and civil society. This week an open letter we helped work on was sent to the Secretary General of the UN and the World Bank by over 200 economists and other leaders on inequality calling for strengthening of global goals on inequality. It reads like a who’s who of the inequality world, especially for a self-confessed inequality geek like me. It was led by Joseph Stiglitz and Jayati Ghosh and signed and supported by Thomas Piketty. It includes many former UN and World Bank bigwigs, including four former World Bank Chief Economists. It is pretty clear:
We are living through a time of extraordinarily high economic inequality. Extreme poverty and extreme wealth have risen sharply and simultaneously for the first time in 25 years. Between 2019 and 2020, global inequality grew more rapidly than at any time since WW2. Billions of people face the terrible hardship of high and rising food prices and hunger, whilst the number of billionaires has doubled in the last decade.
We know that high inequality undermines all our social and environmental goals. The 2006 World Development Report, as well as multiple other studies, have shown that extreme inequality of the kind we are observing today has a destructive effect on society. It corrodes our politics, destroys trust, hamstrings our collective economic prosperity, and weakens multilateralism. We also know that without a sharp reduction in inequality, the twin goals of ending poverty and preventing climate breakdown will be in clear conflict.
The main SDG10 target, based on the World Bank’s Shared Prosperity goal, does not adequately measure, or monitor key aspects of inequality. Evidence from household surveys shows that one in five countries showing a positive trend in Shared Prosperity simultaneously saw inequality by other measures, like the Palma Ratio, increase, including countries such as Mongolia, Chile, and Vietnam.
Goals matter. Leadership matters. The Bank and UN SDGs are uniquely placed to offer the rallying call for a reduction in inequality that our divided world needs so urgently today.
To my mind, there is no doubt that we need to see the institutional and operational muscle of the UN, World Bank and IMF systematically taking inequality, and the distributional impacts of polices and actions into account. How will this subsidy or tax proposal impact the poor, the middle classes, the rich? Without such distributional understanding, policy making is blind, driven by assumptions and not empirical evidence. And without accurate measurement this will not be possible.
Just using the Gini and the Palma ratio instead of Shared Prosperity would be a fantastic start. Looking at wealth as well as income is critical too. I particularly like the Palma ratio, because it is so easily understood- something wonderfully described by my colleague Anthony in his forthcoming blog this week:
The Palma ratio is the ratio of the income of the top 10% to that of the bottom 40%. Economists like complicating simple things through their mathematical modelling that no one else outside of their profession can understand. The simplicity of the Palma measurements makes life easier for all of us and places it ahead of the pack. I can clearly explain it to my mother in the rural village whose highest education is primary school. My member of parliament would get it. For the technocrats at the Parliamentary Budget Office, I merely need to mention the Palma ratio and they get the point.’
Of course, measures and indicators are as political as they are technical. I suspect many rich and powerful people would prefer to remain uncounted. But I do think that this year we may have an opportunity to further strengthen global goals on tackling inequality, and that has to be a good thing.
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