This article gives a nice summary of some of the issues in measuring inequality.
Wade, Robert. 2001. "Winners and Losers." The Economist (28 April). Global inequality is worsening as the distribution of income becomes more unequal. The answer to what is happening to world income distribution turns out to depend heavily on whether countries are weighted by population, and whether income in different countries is measured in PPP terms or by using actual exchange rates. If countries are treated equally (not weighted by population) and average income is measured in PPP terms, most studies find that world income distribution has become more unequal in the past few decades. If countries are weighted by their populations (so that China's change in average income counts for many times more than Uganda's), the world's PPP income distribution over recent decades shows little change. When incomes in different countries are compared using actual exchange rates, the evidence shows that world income distribution has become much more unequal over the past several decades, and that inequality accelerated during the 1980s, whether countries are treated equally or weighted by population. When incomes are compared using PPP calculations, the degree of inequality shrinks, and so does the rate of widening. Many assume that PPP measures are always superior. Certainly the exchange rate is a flawed measure of purchasing power: it fails to reflect the large amount of non-monetary exchange in developing countries, or money payment for services that are not subject to international competition. Also, exchange rates are much affected by capital flows and by monetary policy. But PPP measures have their drawbacks as well. Different methods of measuring purchasing-power parity, all plausible in themselves, yield different results. Comprehensive estimates of PPP incomes for developing countries, based on actual data on prices of comparable goods and services, go back only to the 1970s. This makes longer-run analysis difficult. Finally, incomes based on actual exchange rates may be a better measure than PPP of relative national power and national modernity--matters of more interest to sociologists and political scientists, no doubt, than to economists. In any event, the bulk of the evidence on trends in world income distribution runs against the claim that world income inequality has fallen sharply in the past half-century and still faster in the past quarter-century. None of the four approaches supports that idea. Two very recent studies based on new data challenge the finding that world PPP-income distribution weighted by countries' population shows little change over the past few decades. The new studies show, on the contrary, a rapid rise in inequality. These new studies differ from the others in being based solely on household income and expenditure surveys. The earlier ones either used average GDP, ignoring inequality within each country, or used indirect methods to estimate within-country inequality, including production surveys and revenue surveys, which typically miss important components of household incomes. Branko Milanovic at the World Bank assembled the database, using the Bank's formidable statistical organisation to obtain household survey data from just about all the Bank's members, covering 85% of the world's population, for the years 1988 and 1993. The result is probably the most reliable data set on world income distribution. Then Mr Milanovic computed the Gini coefficient for world income distribution, combining within-country inequality and between-country inequality, and measuring it in PPP terms. (The Gini coefficient is a commonly used measure of inequality: 0 signifies perfect equality, 100 means that one person holds all the income.) The results are startling. World inequality increased from a Gini coefficient of 62.5 in 1988 to 66.0 in 1993. This is a faster rate of increase of inequality than that experienced within the United States and Britain during the 1980s. By 1993 an American on the average income of the poorest 10% of the population was better off than two-thirds of the world's people. The other new study, by Yuri Dikhanov and Michael Ward, uses the same data set with a different methodology. It confirms that world income distribution became markedly more unequal between 1988 and 1993. Like the Milanovic study, it finds that the Gini coefficient increased by about 6%. It finds, further, that the share of world income going to the poorest 10% of the world's population fell by over a quarter, whereas the share of the richest 10% rose by 8%. The richest 10% pulled away from the median, while the poorest 10% fell away from the median, falling absolutely by a large amount. In short, we have to revise cell 4. World PPP income distribution with countries weighted by population (and China and India split into urban and rural) became "much more unequal" between 1988 and 1993 (see table 3). Why has global inequality increased? The answer is in four parts: (1) faster economic growth in developed OECD countries than developing countries as a group; (2) faster population growth in developing countries than in OECD countries; (3) slow growth of output in rural China, rural India, and Africa; and (4) rapidly widening output and income differences between urban China on the one hand, and rural China and rural India on the other. The income of urban China grew very fast during 1988-93, which reduced the gap between China's average income and that of the middle-income and rich countries, and so reduced the world Gini coefficient; but the widening gaps between rural China and urban China and between urban China and rural India increased world inequality by even more. These trends in turn have deeper causes. Technological change and financial liberalisation result in a disproportionately fast increase in the number of households at the extreme rich end, without shrinking the distribution at the poor end. Population growth, meanwhile, adds disproportionately to numbers at the poor end. These deep causes yield an important intermediate cause that makes things worse: the prices of industrial goods and services exported from high-income countries are increasing faster than the prices of goods and services exported by low-income countries, and much faster than the prices of goods and services produced in low-income countries that do little international trade. These price trends mean that the majority of the population of poor countries are able to buy fewer and fewer of the goods and services that enter into the consumption patterns of rich-country populations. The poorer countries and the poorer two-thirds of the world's population therefore suffer a double marginalisation: once through incomes, again through prices. Hence the figures in table 3, which show that the gap between the richest 10% of the world's population and the median is widening, and the gap between the median and the poorest 10% is also widening. Income divergence helps to explain another kind of polarisation taking place in the world system, between a zone of peace and a zone of turmoil. The regions of the wealthy pole show a strengthening republican order of economic growth and liberal tolerance (except towards immigrants), with technological innovation able to substitute for depleting natural capital. The regions of the lower- and middle-income pole contain many states whose capacity to govern is stagnant or eroding, mainly in Africa, the Middle East, Central Asia, Russia, and parts of East Asia. Here, a rising proportion of people find their access to basic necessities restricted at the same time as they see people on television driving Mercedes cars. It is remarkable how unconcerned the World Bank, the IMF and other global organisations are about these trends. The Bank's World Development Report for 2000 even said that rising income inequality "should not be seen as negative" if the incomes at the bottom do not fall and the number of people in poverty falls. Such lack of attention shows that to call these world organisations is misleading. They may be world bodies in the sense that almost all states are members, but they think in state-centric rather than global ways. They neglect not only matters of world income distribution, but also world inflation, world exchange rates, and world interest rates; and, in the case of the World Bank, the global environmental issues of the oceans, the atmosphere, and nuclear waste.
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