On inequality, let’s do the Palma (because the Gini is so last century)

What better place than South Africa to run an inequality week on the blog? Today’s guest post from Alex Cobham (left) and Andy Sumner (right) summarizes their new paper on inequality – got a feeling this one might be quite important. Tomorrow, Brazil v South Africa.

There’s one measure of inequality that gets all the attention – the Gini index. The Gini was developed in the early 1900s – in fact about 100 years ago – by Italian Statistician, Corrado Gini (see pic, looks like a real party animal). A century later our paper argues that it may be time for a rethink on measuring inequality. Why?

it's no fun being a guru

The Gini reflects the difference between the actual cumulative distribution of income, or anything else in a population, and perfect equality (the yellow area in the graphic). A Gini value of zero would mean that the distribution is completely equal and a Gini value of one would mean that one person had all the income and everyone else nothing (i.e. all of the green area would be yellow).

Simple, eh? So, what’s the difference between a country A with a Gini of 0.4 and country B with a Gini of 0.45? We can say country B (0.45) is a bit less equal than country A (0.4). What we can’t is where that inequality exists. Is it a squeezed middle? Or is it at the poor’s end of the distribution?

So if you’re a policy maker working for an incoming president elected on a mandate to address inequality and increase the share of income to the poor, the Gini won’t be a great deal of help.

It’s also long been known thanks to inequality guru Tony Atkinson that the Gini is over-sensitive to changes in the middle of the distribution – and, as a consequence, insensitive to changes at the top and bottom. That’s a problem because we care most about what happens at the top and bottom in developing countries.

So, we’ve just put out a new paper, predictably titled ‘Putting the Gini back in the Bottle?’, exploring an alternative measure for policy, which is sensitive to exactly that. We’ve called it the ‘Palma’ as it is based on the research of Chilean economist, Gabriel Palma (below). When Palma started looking at the finer grain of inequality, rather than just the Gini, he made a startling observation (see Duncan’s take on it here).

He found that the ‘middle classes’ – more accurately the middle income groups between the ‘rich’ and the ‘poor’ (defined as the five ‘middle’ deciles, 5 to 9) – tend to capture around half of GNI – Gross National Income wherever you live and whenever you look. The other half of national income is shared between the richest 10% and the poorest 40% but the share of those two groups varies considerably across countries.

Palma suggested distributional politics is largely about the battle between the rich and poor for the other half of national income, and who the middle classes side with.

So, we’ve given this idea a name – ‘the Palma’ (brilliant eh?) or the Palma Ratio. It’s defined as the ratio of the richest 10% of the population’s share of gross national income (GNI), divided by the poorest 40% of the population’s share. We think this might be a more policy-relevant indicator than the Gini, especially when it comes to poverty reduction.

In the paper, we do a few things. First, we confirm the robustness of Palma’s main results over time: the remarkable stability of the middle class capture across countries, coupled with much greater variation in the 10/40 ratio.

Second, we suggest that the Palma might be a better measure for policy makers to track as it is intuitively easier to understand for policy makers and citizens alike. For a given, high Palma value, it is clear what needs to change: to narrow the gap, by raising the share of national income of the poorest 40% and/or reducing the share of the top 10%.

Third, we also present some tentative but striking evidence of a link between countries’ Palma and their rates of progress on the major Millennium Development Goal (MDG) poverty targets. More work is needed, and there are all sorts of caveats, but the results indicate that countries that reduced their Palma exhibit mean rates of progress which, compared to countries with rising Palmas, are three times higher in reducing extreme poverty and hunger, twice as high in reducing the proportion of people lacking access to improved water sources, and a third higher in reducing under-five mortality. If that isn’t worth a closer look we don’t know what is.

Of course not everyone is going to like our paper – we sent it around the great and the good of the inequality world and really got a ‘marmite effect’ –people love or hate it (Andy’s New Bottom Billion paper on poverty in middle income countries got much the same initial response). Who likes it? Without naming names, here are the main love/hate responses – stylized – for a few salient groupings (those who commented on the paper shouldn’t get too hung up on this table).

We think there’s an important debate to be had on measuring inequality, especially if the post-2015 discussions take it into central account. So let’s start with a vote (see right), preferably after you’ve taken a look at our paper.

Andy Sumner is co-director of the newly established, International Development Institute at King’s College London, that is seeking to study development from a different angle. Alex Cobham is a research fellow at the Center for Global Development in Europe and a member of the advisory group of the UN consultation on inequalities in post-2015.

‘It’s the share of the rich, stupid’: brilliant inequality stats + politics from Gabriel Palma

A while back I reposted Andy Sumner’s blog on new research on inequality from the Chilean economist Gabriel Palma (right). But I’ve now read the paper, catchily titled ‘Homogeneous middles vs. heterogeneous tails, and the end of the ‘Inverted-U’: the share of the rich is what it’s all about’ and am so blown away, that I have to come back for another go – it really is a brilliant piece of work. The Development and Change paper is gated (when is the revolution in academic journal publishing going to hit the development sector – time for DFID and the ESRC to take a lead?), but there’s a longer version on the Cambridge economics website.

Rather than just look at the single number of the Gini index to describe inequality, Palma crunches the numbers on inequality decile by decile (decile 10 is the richest 10% of a country’s population , decile 1 the poorest 10%) and what he finds is extremely important. Namely:

‘There are two opposite forces at work.  One is ‘centrifugal’, and leads to an increased diversity in the shares appropriated by the top 10 and bottom 40 per cent.  The other is ‘centripetal’, and leads to a growing uniformity in the income-share appropriated by deciles 5 to  9.  Therefore, half of the world’s population (the middle and upper-middle classes) have acquired strong ‘property rights’ over half of their respective national incomes; the other half, however, is increasingly up for grabs between the very rich and the poor. 

Globalisation is thus creating a distributional scenario in which what really matters is the income-share of the rich —  because the rest ‘follows’ (middle classes able to defend their shares, and workers with ever more  precarious jobs in ever more ‘flexible’ labour markets).  Therefore, anybody attempting to understand the within-nations disparity of inequality should always be reminded of this basic distributional fact following the example of Clinton’s campaign strategist: by sticking a note on their notice-boards saying “It’s the share of the rich, stupid”.  

In passing he also points out that there is no evidence at all for a ‘Kuznets curve’ in inequality, which argues that ‘things have to get worse before they get better’, i.e. that countries that want to develop have to accept a period of greater inequality, before they all end up like Sweden.

Looked at in terms of the Gini index, Palma finds a convergence between countries over the last 20 years, with the least unequal countries becoming more unequal (especially former communist bloc economies), while the most unequal (mainly in Latin America) have become slightly more equal (and got a lot of hype and praise for doing so).

But it’s the decile breakdown that is really interesting. The first graph (right – if it’s too small, click and keep clicking ’til it expands) shows the share of deciles 10 and 9 across 135 countries. What it shows is that the real driver of inequality variations within countries is the richest 10% (and probably only the richest fraction of them). Even the next richest 10% basically gets the same chunk of national income across all countries. Palma puts this down to ‘one of the key characteristics of neo-liberal economic reforms: its ‘winner-takes-all’ proclivity.’

But if you add up the income shares of the 50% of the population just below that rich 10% you find that in almost all countries, they receive about half the national income (see graph 2, below). As Palma puts it:

‘A schoolteacher, a junior or mid-level civil servant, a young professional (other than  economics graduates working in financial markets), a skilled worker, middle-manager or  a taxi driver who owns his or her own car, all tend to earn the same income across the  world.’ [when their incomes are 'normalised' for the differences in the income per capita, that is].

Thus he finds ‘extraordinary contrast between the distributional-heterogeneity at the top and bottom of the income distribution and the remarkable homogeneity in the middle.’

All this has some intriguing implications, not all of them terribly welcome. For example his analysis: ‘casts doubts on the role that ‘human capital’ is supposed to have on income distribution according to mainstream economics and UN reports.  According to this theory, the level of education is a crucial variable (if not the most crucial variable) in the determination of income inequality.  However….. if most of the world’s  educational diversity (both in terms of quantity and quality) is found among the  population in ‘D5–D9’ — e.g. in terms of the share of the population with secondary and  (especially) tertiary education — why does one find extraordinary similarity across  countries in the shares of national income appropriated by this educationally highly  heterogeneous group?’ Oops.

More happily, his analysis also shoots down the ‘aristocracy of labour’ explanation for the uniquely high levels of inequality in Latin America. A favourite argument of the structural adjustment brigade in the 80s and 90s, this argued that ‘excessive’ labour rights and unionisation was keeping poor people out of the skilled labour force and driving up inequality. But Palma concludes ‘what really differentiates Latin America’s inequality is located at the tails of the distribution of income — hardly where skilled workers are located.’

Then he starts to get enjoyably heated, describing the region’s oligarchies as ‘living fossils’ and arguing that

‘Perhaps those following the Washington Consensus should give their ideology a  sabbatical and go back to their drawing boards, and start thinking again about why the  capitalist élites in Latin America and South Africa are able to appropriate a share of  national income that is so much higher than anybody else’s.  In particular, so much  higher than in other middle-income countries — such as those in North Africa, the former  Soviet Union, Eastern Europe, the Caribbean, and the second-tier NICs — where often  there are more markets rigidities; where prices, institutions and social capital are less  ‘right’; where property-rights are often less well-defined and less well-enforced; where  there is often more educational segmentation; where the educational systems for the  poor are even more dismal; where there is even greater gender discrimination; even  more shortages of skilled labour; where democracy could be described as more ‘low intensity’; where there are more problems of ‘governance’; where success or failure in  business depends even more on political connections and corruption, and so on.’

Instead, he puts it all down to politics:

‘In Latin America the middle classes seek to defend their share of income with different forms of alliances with the élite (some more successfully than others).  This is different to India, for example, where the administrative classes defend their position mostly via alliances with the poor (which gives them the political power to mediate in the different conflicts between the capitalist élite and the state)’. Vintage stuff.

What’s going on with global inequality? Let’s ask Andy Sumner……

When I was asking around about last week’s Oxfam paper on the G20 and inequality, ace number cruncher Andy Sumner emailed to say that in his opinion, talking about inequality in terms of the Gini index (a single number for overall inequality) is terribly old hat, and these days, everyone is trying out different indicators to get at the fine detail of different kinds of inequality. So I went back to his July summary of the latest research on within-country inequality on Global Dashboard, and I have to say, it is brilliant. Some highlights:

‘What’s happening to within-country inequality isn’t immediately clear.

The new Solt database of the main measure of inequality (known as the Gini after an Italian Sociologist who developed it) was analysed by Ortiz and Cummins at UNICEF who concluded the evidence showed:

Rising inequality in Asia, 1990-2008 but falling inequality in Sub-Saharan Africa over the same time period.

And inequality in Latin America rose slightly 1990-2008 but fell between 2000-2008 and inequality was static in the Middle East and North Africa.

Ortiz and Cummins list a long set of countries where inequality significantly fell between 2000-2008. For example, inequality fell by more than 3 points in Thailand, Malaysia; Brazil, Peru, Argentina, Chile; Lesotho, Malawi, Ethiopia, Burundi, Mali, Sierra Leone, Burkina Faso, Uganda, Nigeria, Gabon.

However, a new paper by Chilean Economist Gabriel Jose Gabriel Palma does a detailed study of within country inequality between 1985 vs 2005 suggesting the Gini hides as much as it reveals.

Instead we need to look at each 10% of the population and what they get.

He finds that there is now a surprising similar picture in most countries, noting:

1. The great majority of regions and countries have a relatively similar distribution of income inequality because countries with low inequality at the outset (1985) have got more unequal and countries with high-inequality have got slightly more equal.

2. The middle classes generally get half of the economic pie wherever you look and the middle classes are incredibly successful about protecting their half.

3. Politics is increasingly a fight for the remaining half between the richest 10% and poorest 40% meaning the other half of the distribution is increasingly ‘up for grabs’ between the very rich and the very poor and who can win over the middle classes.

This might begin to explain some of the recent declines in inequality in Latin America as suggested in a paper by Birdsall et al., who argue that ‘social democratic’ regimes (eg Brazil, Chile and Uruguay) are more likely to reduce inequality than ‘left populist’ (eg Argentina, Bolivia, Ecuador, Nicaragua and Venezuela) and both are more likely to reduce inequality that non-left regimes (eg Colombia, Costa Rica Mexico, Peru) and that this is largely due to more social spending and more progressive spending especially so in the social democratic regimes (eg spending on cash transfers targeted to the poorest and greater increases in spending on health and education and increases in spending on basic services – in particular in education, greater increases in spending on primary and secondary schooling rather than on public universities.

These social democrats have strong support in the middle classes and this throws up the question posed by Birdsall et al:

Might the growing middle classes in countries like Chile and Brazil help lock in leftist social democratic political regimes (whether because or despite its concentration in the top quintile of households)?  There is no evidence that a large middle class is necessary let alone sufficient to these regimes.  But a growing global middle class does seem likely to reinforce effective government that manages moderate redistribution while retaining investor confidence in the likelihood of continuing growth and price stability. Put another way: When is the middle class large enough to become politically salient in supporting or at least tolerating the kind of social and other distributive policies that are good for them but turn out to be good for the poor—for example universal public education?

Food for thought – the middle classes as the new revolutionaries?’

Great stuff. It set me thinking about one of the findings of our paper – that whereas inequality is falling in many low and lower middle income countries (see chart), it is rising in all but four of the G20 countries. Might that be because the middle class is more likely to ally with the elite in the G20 countries than elsewhere and why could that be? Perhaps because their economies are integrated, or more dominated by financial institutions? Just idle speculation of course  - feel free to add y0ur own.

As for organizations like Oxfam, it seems to provide empirical support for our focus on ‘convening and brokering’ – the latest jargon for getting people from different social and economic backgrounds into a room, and helping them build alliances. Any other thoughts?