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

March 19, 2013

     By Duncan Green     

Alex CobhamWhat 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 Andy Sumner mugnew 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

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 exactlygini area 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.

inequality cartoon 2

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 whatGabriel Palma 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).

Love it Hate it
Inequality gurus and wonks Those who appreciate the point about communicability and policymaker accountability Those who feel the mathematical properties of an inequality measure are more important
Other wonks Those who feel tackling inequality (or at least, vertical inequality) is central to development Those who prioritise other aspects, e.g. the 0.7 target for aid
Economists More ‘political’ economists, philosophers More technical economists

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.

March 19, 2013
Duncan Green