Development indicators  

Gianni Vaggi and Clara CapelliUniversity of Pavia November 2013

Inequality

• Relative concept;

• Focus on distribution (wealth, income, opportunities, etc.);

• Unlike efficiency (see Pareto), there is no widespread consensus onthe definition of equity/distributive justice;

• Income distribution can be functional (i.e. wages, profits, rents) or personal.

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The personal distribution of income depends on:

• Personal features and skills;

• Personal position wrt to an economy’s productive structure;

• Welfare schemes (the so-called "secondary personal distribution ofincome)

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The Lorenz CurveThe Lorenz Curve

• Developed in 1905 by Max Lorenz;

• Relates the cumulative proportion of income to the cumulativeproportion of individuals;

• The x-axis records the cumulative proportion of individuals, rankedby income level (from the poorest to the richest);

• The y-axis records the income share for each proportion ofpopulation.

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Measuring InequalityInequality Trends

How to Draw a Lorenz Curve

Calculate the proportion of income belonging to each individual;

Calculate which proportion of total population each individualrepresents;

Sort these individuals on the basis of the income they own;

Define the line of equidistributed income;

Plot the cumulative proportion of income against the cumulativeproportion of population.

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The Gini CoefficientThe Gini Coefficient

How can we compare Lorenz Curves? An index allows for easiercomparisons.

• Introduced by Corrado Gini in 1912 (Variability and Mutability);

• Measures the inequality among values of a frequency distribution;

• Ranges from 0 (perfect equality) to 1 (complete inequality);

• It is equal to the area between the equality line and the Lorenz Curve, divided by the area below the equality line;

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Gini coefficients, 2008Gini coefficients, 2008

Afghanistan 27.8Argentina 46.3Brazil 55.1Colombia 57.2China (2005) 42.5Ghana (2006) 42.8Egypt 30.8India 33.4Nigeria 44.8Malaysia (2007) 46.2Mozambique 45.7Russia 42.3Thailandia 40.5Turkey 39.0Venezuela (2006) 44.8West Bank & Gaza (2007) 38.7

Source: WB DatabaseEconomia dello Sviluppo

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Kuznets CurveKuznets Curve

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Kuznets Curve/2Kuznets Curve/2

• Industrialization and rural-urban migration lead to a rise ininequality;

• After a certain level of income, democracy and welfare schemesallow for more equality;

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Again on China & India, Brazil & VenezuelaAgain on China & India, Brazil & Venezuela

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Kuznets Curve: CriticismsKuznets Curve: Criticisms

Fields (2001): other factors matter more than the stage ofdevelopment (history&geography, role of mining, access to land,etc.);

Stiglitz (1996): East Asian Miracles shows that Kuznets’ story doesnot hold;

Palma (2011): The real difference is made by what is appropriatedby the richest decile.

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The Gini coefficient fell in 44 countries (out of 81 examined):

Source: WBI, 2012

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Maddison, The World Economy. Historical Statistics (2003)

• World inequality falls between 1950 and 1960 (post-war catching upof Europe and Japan);

• It then rises strongly until 1980 (rapid growth of developedcountries);

• It then falls, mainly because of China.

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Source: Maddison, 2003

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Source: Maddison, 2003

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Measuring InequalityInequality Trends

Bourguignon & Morrisson, Inequality Among World Citizens, 1820-1992 (2001):

• World inequality (global Gini) increased by 30 percent, hitting 0.6;

• This is mostly due to the "between" component;• A comparatively little difference was found between the world

distribution of the 1990s and in the 1950s;• Stabilizing effect of the "within" component.

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