World Bank's proposed inequality indicator too weak, experts warn

The World Bank has said it plans to change the way it measures inequality in a bid to help tackle the growing problem. However, civil society groups are worried that the proposed new indicators are too weak and let many countries off the hook. The world is experiencing an “explosion of inequality,” linked to the COVID-19 pandemic and the fallout from the war in Ukraine on food and energy prices, which have seen the richest get richer, and the bottom half of the world’s people suffering huge health, education, and economic losses, according to a 2023 Oxfam report. According to the World Bank, in 2020, global inequality rose for the first time in decades in part due to the pandemic. Reducing inequality by 2030 is one of the U.N. Sustainable Development Goals, but the way it currently measures this is flawed, some experts say. At the moment, SDG 10 is measured using the World Bank’s “Shared Prosperity” indicator, which looks at the extent to which the incomes of the bottom 40% of a country’s population are growing along with gross domestic product, or GDP. However, this ignores the huge wealth and income concentrated among the super-rich, while also leaving out those in extreme poverty, critics argue. “It is also important to analyze the concentration of wealth — and power — by elites to fully grasp the extent and implications of inequalities.” --— Michael Krake, executive director for Germany, World Bank This is part of a longer-term trend in which institutions like the World Bank have traditionally tended to see inequality as a side issue. But this thinking is clearly changing. In April 2022, the bank launched a Poverty and Inequality Platform, or PIP, which collates comprehensive inequality data on countries. However, change is not happening fast enough, experts warn. “If you look only at the Shared Prosperity indicators then only 13 countries are worse, everyone else is doing better,” renowned development economist Jayati Ghosh, a professor at the University of Massachusetts Amherst, told Devex. “But the world’s people really do see inequality increasing. So to then say that everything is fine and your country is doing well on this inequality indicator, what does that do to the legitimacy of that indicator and the multilateral system that is proposing that?” Ghosh added. Furthermore, ignoring the reality of rising inequality is “dangerous” because it will inevitably lead to public disaffection, according to Ghosh. Low inequality is associated with higher levels of poverty reduction, but also greater social mobility, better health outcomes and less political polarization. In response, a group of NGOs and more than 200 leading economists, including Joseph Stiglitz, Thomas Piketty and former World Bank chief economists, have been lobbying the World Bank and the United Nations to come up with a more accurate way of measuring inequality. In July, they wrote an open letter to the bank’s recently appointed president, Ajay Banga, and U.N. Secretary-General António Guterres. “You can’t deal with something unless you measure it properly and know how significant it is,” Ghosh said. The bank appears to have listened and is in the process of developing a new way of measuring inequality as part of the newly reformed “Corporate Scorecards,” which the bank uses to track its performance in key global and institutional areas. Banga has vowed to reduce the number of indicators in the scorecard from 153 to around 20. The bank’s board is still discussing the final measure on inequality, sources close to the process said. Meanwhile, a bank spokesperson said “it would be premature to comment at this stage.” Proposed changes include scrapping the Shared Prosperity indicator and replacing it with two new measures as part of the revised scorecard. However, while the advocates are pleased that the bank is finally prioritizing inequality, they are concerned that the measures being discussed are still too weak. “There are very serious concerns about the proposed indicator[s]. As it stands, it risks telling 90% of countries that their levels of inequality are fine, and leaving out countries where the World Bank has already identified inequality as a serious problem,” Max Lawson, head of inequality policy at Oxfam International, told Devex. The first proposed indicator is known as the global prosperity gap and would measure the global average shortfall in income from a prosperity standard of $25 per day. The gap would be “the average factor by which incomes need to be multiplied to bring everyone in the world to the prosperity standard,” according to the bank’s website. In addition, the bank is now proposing a second indicator that would use countries’ Gini coefficient — the most commonly used measure of income inequality — to classify a country’s progress, or lack of, on reducing inequality. The Gini coefficient measures inequality on a scale from 0 to 1, with 1 being the most unequal. The bank plans to classify any country with a Gini above 0.47 as having “high inequality,” people close to the discussions told Devex. However, experts say this would grossly underestimate the world’s inequality by setting the bar too low. For example, in 2019, only 14% of countries had Gini coefficients higher than the 0.47 threshold, according to Lawson, when in reality, inequality is a major problem in many more countries. “The trouble is that this would only include a small group of extremely high inequality countries, which would let a lot of others tacitly off the hook,” Lawson said. “The level they are proposing is simply not credible and would do more harm than good,” he added. The final indicators are still being debated by the board, and so advocates hope there is still time to strengthen the tool. One suggestion, which insiders say has gained traction among board members, would see the bank reverse its thinking and focus on the proportion of countries achieving low inequality, defined as Gini coefficient of 0.3 or below, instead of the number of countries with high inequality. The bank would then track countries’ progress toward the new, positive goal. Francisco Ferreira, who formerly led the bank’s work on inequality and now heads the London School of Economics’ International Inequalities Institute, is one of the economists behind this alternative measurement. Under this plan, the bank’s global metric would measure the number of countries with a Gini below 0.3 and also the number of countries with a Gini above 0.3 but which have recorded an annual decline of 0.01 (one Gini point) since the last measurement, he told Devex. A Gini below 0.3 is a “reasonable” target for countries, he said, adding that the measurement should be relatively easy to calculate since the Gini measure is well known and widely collected. However, some bank staff may have technical issues with the measurement, while other shareholders may argue that the 0.3 target is too difficult to reach, Ferreira added. Another option is for the bank to introduce two categories within its inequality indicator — “very high” and “high” inequality — so that a larger, more realistic, number of countries are covered, according to Oxfam’s Lawson. Within this, the bar for “high” inequality should be set at a much more realistic level, Lawson added. Board members such as Germany said they were pleased to see the bank focusing squarely on inequality. “Clearly the World Bank is making progress on analyzing inequalities and it is encouraging that we call inequality by its name instead of overstressing vague terms like disparity or prosperity gaps,” Michael Krake, the German executive director at the bank, told Devex in a phone interview. Krake stressed the importance of an indicator that takes a “holistic view of inequality measurement” and that analyzes the “entire income or wealth distribution” within a country. This is why he recommends the new corporate scorecard use the Gini coefficient or Palma Ratio — which compares the income or wealth share of the top 10% of the population to the income or wealth share of the bottom 40% — to measure inequality. “It’s not only about inclusiveness and opportunities for the so-called bottom 40% of societies. It is also important to analyze the concentration of wealth — and power — by elites to fully grasp the extent and implications of inequalities,” Krake explained. The United Kingdom also voiced its support for a robust inequality measure. “We are pleased to see the commitment to including a measure of inequality in the new World Bank Corporate Scorecard. … We won’t achieve our vision of ending poverty on a livable planet if people are excluded from development,” Vel Gnanendran, the bank’s executive director for the U.K., told Devex in an email. The final decisions about the exact nature and ambition of the new inequality indicator will be made ahead of Christmas, sources said.