What is shared prosperity, and how do we know if it’s on the rise?
This blog post is an adaptation of Nick’s recent article in Global Policy.
The World Bank has chosen an indicator of shared prosperity that’s inadequate, and gives a distorted picture of progress. According to the Bank’s indicator, countries where the poorest forty percent are faring better than the country average are considered to be experiencing shared prosperity. Yet, comparing the poorest to the average masks whether income and wealth are concentrating among the very rich at the top. Given what we know about the dangers of extreme inequality, the Bank’s indicator is not only misleading, but irresponsible.
Extreme income and wealth concentration among the rich undermines poverty reduction, and therefore impedes shared prosperity. Other threats to shared prosperity from extreme inequality include weaker economic growth, and diminished opportunities for poor kids to build better lives than their parents.
Given the threat posed by extreme inequality, shared prosperity should be assessed by how the poorest are faring compared to the richest.
What happens to the Bank’s Shared Prosperity claim if we compare the poorest forty to the richest ten percent?
Last year, The Bank declared shared prosperity increased between 2006 and 2011 in 58 of the 86 countries (67 percent) for which they have data. Again, this is because the poorest forty percent ‘fared better’ than the country average between the two years. However, when we alter the Bank’s measure and compare the poorest forty to the richest ten percent (instead of to the country average), the Bank’s results are weaker. Among the Bank’s 58 winners, the bottom forty performed better than the richest ten percent in only 46 countries.
Additionally, the Bank’s Results are Misleading
Recall, the Bank’s criteria for rising shared prosperity is that poorest forty percent ‘fared better’ than the country average. This doesn’t mean the incomes of the poorest forty percent grew more than the average. This is because the Bank includes among its shared prosperity ‘winners’ five countries in which the poorest forty percent and the whole country experienced negative income growth. They are declared winners because the income loss among the country average was greater than the loss among the poorest forty percent. Alas, everyone’s poorer.
If we combine the countries where the top ten grew more than the bottom forty, with those where growth was negative, the number falls from 58 winners to 44. This means the Bank’s claim that 67 percent of the countries saw rising shared prosperity falls to 51 percent, or barely half. Thus, the claim of rising shared prosperity is hard to substantiate.
What About the Richest Five Percent, and Fewer?
An even stronger shared prosperity measure would compare the poorest forty to richest five percent, or fewer. This is because of the significant concentration of incomes accruing above the 95th percentile. In fact, if we look at the richest ten percent across countries, we see that the 90th – 95th percentiles capture about ten percent of national income on average. However, the richest five percent captures nearly double this! Figure 3 below looks at nine countries that are home to seventy percent of the world’s extreme poor. As shown, the richest five percent saw annualized mean income gains greater than the poorest forty percent in every country except Madagascar (where both groups saw income declines). Table 4 calculates the share of national income captured by each group between the two years. With the exception of Bangladesh and Madagascar, the poorest forty percent lost shares of total income (despite seeing mean income increases). That is, the pie became bigger, but the poorest forty captured a smaller slice despite seeing a rise in incomes (though not as much as the richest five percent).
The World Bank Should do a Better Job Measuring Shared Prosperity
Comparing the poorest forty to the average makes less sense than comparing to the richest ten percent, or fewer. Toward this end, voices within civil society and academia are pushing for new measures. For instance, Alex Cobham and Andy Sumner are advocating for an inequality measure they call The Palma (named after economist Gabriel Palma). The Palma is an easy to understand number derived from the ratio of the income shares between the poorest forty and richest ten percent. The higher the ratio, the greater the inequality level. Likewise, Alice Krozer is promoting a revised version that computes the ratio between the poorest forty and the richest five percent. Of course, no measure of shared prosperity is perfect. These measures can suffer from lack of country level data, among other problems. Still, in a world of rising within-country inequality, where the gains of growth are going disproportionately to the richest, the emphasis on comparing the top to the bottom represents a more honest and accurate assessment of whether shared prosperity is rising or not.