Germany is undermining future growth. Philippe Legrain

On Inequality, Let’s Do the Palma

The Gini coefficient is so last century. Policymakers interested in poverty reduction should notice of alternative ways of measuring inequality.

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 the Italian statistician Corrado Gini. A century later it may be time for a rethink on measuring inequality.

Why? The Gini reflects the difference between the actual cumulative distribution of income, or anything else in a population, and perfect equality. 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. 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 policymaker 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.

Putting the Gini back in the bottle

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.

When Palma started looking at the finer grain of inequality, rather than just the Gini, he made a startling observation (see Duncan Green’s take on it here). Palma 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 percent and the poorest 40 percent, but the share of those two groups varies considerably across countries. Palma suggested that 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 percent of the population’s share of gross national income (GNI), divided by the poorest 40 percent 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.

Reducing extreme poverty

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 policymakers 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 percent and/or reducing the share of the top 10 percent.

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, but we think there’s an important debate to be had on measuring inequality, especially if the post-2015 discussions on new UN poverty goals are likely to take it into account.

This post was written with Alex Cobham. It first appeared in the Global Policy Journal, “an innovative and interdisciplinary journal and website bringing together world class academics and leading practitioners to analyse both public and private solutions to global problems and issues”.

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