Global Perspectives on Income Inequality: Challenges and Policy Recommendations

 
Income Inequality: Challenges
for Measurement and Policy
 
Martin Ravallion
 
1
 
Public Lecture, Ungku Aziz Center for Development Studies,
University of Malaya, January 29 2019
Inequality is getting much attention globally
 
Part A: How are we doing?
Received wisdom + dissenting views
Global perspective + Malaysia
 
Part B: How can we do better?
Objectives and constraints; policy options
Recommendations for thinking about better policies.
2
 
Part A: How are we doing?
First, the received wisdom
 
3
A (super) short history of global inequality
 
Rising global inequality 
from 1820 to about 1990.
Driven mainly by divergent growth processes: today’s rich world
takes off from the early C19
th 
(though some late starters).
 
The pattern changed dramatically toward the end of the
C20
th
. 
Falling global 
relative
 inequality in the new Millennium.
Driven by convergent growth processes, esp., high growth in
Asia.
4
 
Global relative inequality since 1990
 
5
 
Source: Francois Bourguignon, 
Globalization and Inequality
. Princeton University
Press, 2016
 
Rising inequality within many countries,
but not all
 
Average inequality 
within
 countries has edged upwards since
2000.
Famous examples of US, China (though signs of stabilization)
and India. Also some newcomers; e.g., Indonesia
But also falling inequality in some countries (Brazil, Malaysia).
Signs of (slow) 
inequality convergence
: inequality tends to rise
when low, fall when high.
All this assumes 
anonymity
. Rising inequality based on cross-
sectional surveys is consistent with 
convergent income
changes
 in longitudinal data. Indeed, often observed.
 
6
Yet falling absolute poverty
The most common approach to poverty measurement sets
a line with constant real value over time and space
Falling % (and number of) poor in developing world as a
whole and many countries, including Malaysia.
7
 
Malaysia
(official poverty measures)
 
Developing world
(World Bank)
 
8
 
 
 
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Slope = -2.2
(s.e.=0.27)
 
Source: Martin Ravallion, 
The Economics of Poverty: History, Measurement,
Policy.
 Oxford University Press, 2016
 
Malaysia
 
9
 
Growth incidence curve for Malaysia,
1984-2016
 
10
 
Source: Martin Ravallion, “Ethnic Inequality and Poverty in Malaysia,” Working Paper,
2019.
 
Malaysia: poverty rates by ethnicity
 
11
 
Source: Martin Ravallion, “Ethnic Inequality and Poverty in Malaysia,” Working Paper,
2019.
 
Malaysia: Long-run decline in inequality
 
12
 
Source: Martin Ravallion, “Ethnic Inequality and Poverty in Malaysia,” Working Paper,
2019.
 
Ethnic convergence
 
13
 
Source: Martin Ravallion, “Ethnic Inequality and Poverty in Malaysia,” Working Paper,
2019.
 
Falling inequality 
within
 ethnic groups
 
14
 
 
Source: Martin Ravallion, “Ethnic Inequality and Poverty in Malaysia,” Working Paper,
2019.
 
Bulk of the fall in absolute poverty is due to
growth, though falling inequality helped
 
Falling inequality has meant that economic growth has had a
larger impact on absolute poverty.
Elasticity of poverty rate to mean of -3.6. This would have only
need -2.2 without the fall in overall inequality.
Elasticity of poverty rate to Gini index (holding mean constant)
was 9!
Decomposition of change in log poverty rate (1984-2015):
75% is
 
due to rising mean income.
 
15
 
The received wisdom is out-of-step
with some popular thinking
 
16
 
Three things are missing from the
way economists think about “inequality”
 
1.
Absolute inequality matters
2.
The poorest matter
3.
Relative income matters
 
17
 
1. Wake up call to economists:
Many people care about 
absolute
 inequality,
and they care about the 
extremes
 
18
Absolute versus relative inequality
 
Relative inequality
 is measured using the ratios of incomes
relative to overall mean.
Absolute inequality
 is about the absolute differences—the
gap between rich and poor.
Absolute inequality matters more to many people.
Which is more unequal?
State A: (1, 2, 3)
State B: (2, 4, 6)
Over 
half
 the students (n=450) say State B has higher
inequality. Similarly for my 
Twitter survey
 (n=250).
Yet most (relative) inequality measures (such as Gini index)
say that there is no difference.
19
 
Debates on inequality are often debates
between absolutists and relativists
 
Perceptions on the ground often differ to the numbers quoted
by economists and statisticians!
Serge Kolm and the “May 68’ers”: Grenelle agreement gave
same relative gain (13%) to all. Many felt this was inequitable.
At local level in developing world, absolutist NGO see rising
inequality but relativist economist sees constant or even
falling inequality.
Neither is wrong: 
Just different axioms of inequality
measurement
 (scale-invariance vs translation invariance).
 
20
 
21
 
Falling relative inequality but rising absolute
inequality globally
 
Two Gini indices
 
Source: Martin Ravallion, “Globalization and Inequality,” 
Journal of Economic
Literature
, 2018.
 
Malaysia: Falling relative inequality,
but rising absolute inequality
 
22
 
Source: Martin Ravallion, “Ethnic Inequality and Poverty in Malaysia,” Working Paper,
2019.
Malaysia: Ethnic
convergence is relative,
not
 absolute
23
 
 
Rising inequality in growing economies?
24
 
Relative inequality
(Kolm’s “rightist” Gini
index)
 
Absolute inequality
(Kolm’s “leftist” Gini
index)
Source: Martin Ravallion, 
The Economics of Poverty: History, Measurement,
Policy.
 Oxford University Press, 2016
 
The dilemma for absolutists!
 
The tendency for absolute inequality to rise with growth
points to a trade-off between reducing absolute inequality
and reducing poverty.
Those who see inequality as absolute, and give high priority to
reducing it, may well find themselves living in an absolutely
poorer world.
Greater clarity is needed on what trade-offs one is willing to
accept between reducing absolute inequality and reducing
absolute poverty.
 
25
 
Nor is the “transfer principle” universally
accepted
 
Pigou-Dalton transfer principle: “mean-preserving transfers
from rich to poor reduce inequality”
This seems very sensible. However, a sizeable minority of my
students and Twitter respondents think that 
(2, 5, 5, 10) is
more unequal than (2, 4, 6, 10).
Yet almost all think that 
(2, 4, 6) is more unequal than (3, 4, 5).
 
Why? People look at the 
high and low ends 
of the
distribution. 
How far are the extremes from the middle?
 
26
 
2. An important aspect of inequality:
Are the poorest left behind?
 
27
Conflicting views
 
The poorest of the world are being left behind. We need to
reach out and lift them into our lifeboat
.” 
U.N. Secretary-
General Ban Ki-moon, 2011
Poverty is not yet defeated. Far too many are being left
behind
.”  Guy Ryder, ILO
Yet economists appear to tell a very different story. A
dages
such as “
a rising tide lifts all boats
” or claims that “
growth 
is
good for the poor
” or that there has been a “
breakthrough
from the bottom
28
 
How can we understand such different claims?
Counting poor people may miss what is
happening to the poorest
29
 
Floor
stays put
 
Rising floor
Yes, the poorest have been left behind!
Fewer people living near the floor, but little change in the floor
30
 
Near zero gain at bottom
Source: Martin Ravallion, 
“Are the World’s Poorest Being Left Behind?”
 
Journal of
Economic Growth
, 2016
Globally: Branko’s Elephant
or Martin’s serpent?
31
 
?
Source: Martin Ravallion, “Globalization and Inequality,” 
Journal of Economic
Literature
, 2018. (“Branko’s elephant” refers to a graph in Branko Milanovic, 
Global
Inequality
, Harvard, 2016)
 
Malaysia’s absolute growth incidence curve
 
32
 
Much less progress in raising the
consumption floor globally
 
33
 
(about $1.00
in 2011 PPP)
 
Source
: Update to Ravallion, “Are Poorest Left Behind?” 
J. Econ. Growth
, 2016.
 
 
No sign that the new
Millennium raised the floor
 
34
 
Malaysia has made somewhat more
progress in raising the floor
 
3. Relative income matters to
perceptions of poverty
 
35
Ungku Aziz on relative poverty
 
Royal Professor Ungku Aziz is famous for his 
Sarong index 
(#
sarongs per persons over 1 year) This is presumably absolute.
But Aziz also recognized that the idea of “poverty” is 
relative
.
Aziz’s thought experiment: Imagine people living on a remote tropical
island. Adequate food and shelter. No inequality. No sense of poverty.
The problem would begin when someone from the island visited
Singapore or Sydney and then became aware of what was lacking in
the level of living of the island people….The main point here is that
poverty is a relative notion based on material inequality
.” (Aziz, p.
1375)
36
Ungku Aziz, 1964, “Poverty and Rural Development in Malaysia,” 
Kajian Ekonomi Malaysia, 
1(1):75-105. Reprinted i
n Ungku Aziz Collected Papers, Vol. 3, Kuala Lumpur 2017.
 
Poverty is absolute in the space of welfare
 
Poverty measures that use a constant real line do not take
account of the concerns people face about 
relative deprivation
and 
social exclusion
.  These are specific to place and time.
An overriding principle: poverty is absolute in the space of
welfare: 
“…
an absolute approach in the space of capabilities
translates into a relative approach in the space of
commodities
 (Amartya Sen, 1983).
Clearly an absolute measure is not welfare consistent if people
care about relative income (or it => capabilities).
But (as we will see) strongly relative lines are also problematic.
 
37
 
Relative income matters!
 
Two ways relative income matters:
1.
Relative deprivation: a person’s well-being depends on both
“own-income” and income relative to social comparators.
2.
Costs of social inclusion rise with average income.
Famously, Adam Smith pointed to the social-inclusion role of a
linen shirt in eighteenth century Europe:
 
“..a creditable day-labourer would be ashamed to appear in
public without a linen shirt, the want of which would be
supposed to denote that disgraceful degree of poverty which, it
is presumed, nobody can well fall into without extreme bad
conduct.”
Anthropologists have often noted the social roles played by
festivals, celebrations, communal feasts, clothing.
 
38
 
Weakly vs. strongly relative lines
 
 
39
 
Weakly
relative
 
Strongly
relative
 
Absolute
 
Mean income
 
Poverty line
 
(0,0)
Social inclusion cost for poorest;
e.g., Adam Smith’s linen shirt, which
costs just as much for the poorest
.
 
The key issue in measuring relative poverty:
the elasticity of the poverty line
 
A strongly relative line has an 
elasticity of unity 
(one); if the
mean increase by 10% say then the poverty line increases by
10%.
If all incomes grow at the same rate then poverty measure is
unchanged.
By contrast, a weakly relative line has an 
elasticity less than
unity
.
The ratio of the poverty line to the mean falls as the mean
rises.
Naturally then, relative poverty is less responsive to overall
economic growth.
 
40
 
Growth is a less important proximate cause of
uneven progress against 
relative
 poverty
 
 
41
 
Elasticity of absolute poverty to growth in mean = -2.2.
Elasticity of (weakly) relative poverty to
 mean = -0.4.
 
 
 
Is Malaysia’s official poverty line credible?
 
Fixed in real terms over 40 years, despite substantial progress
in raising average living standards.
Frequent claims in the media that the poverty line is too low
by today’s standards.
 
42
Malaysia’s official poverty line is lower than
expected given current mean income
Malaysia’s
poverty line
made sense in
the 1970s.
But it is well
below
international
standards today.
Expected line of
about $12
rather than $4.*
43
 
O
M
a
l
a
y
s
i
a
(
$
4
,
 
3
.
3
3
)
 
Source: Ravallion, Martin, and Shaohua Chen, 
2018, “Welfare-Consistent Global
Poverty Measures,” NBER Working Paper 23739.
 
Illustrative example
for Malaysia
 
44
 
 
Weakly relative line 
is more in line with the international
experience in countries with similar average income.
Slope = 0.33; Intercept =$2.50 (“hard core poverty line”).
 
Poverty
 line
 
Mean
 
Absolute and (weakly) relative poverty in
Malaysia
Warning against 
strongly
 relative lines
46
Weakly relative: $2.50 + one third of current mean
Strongly relative: 50% of current mean
Strongly relative shows
falling poverty during global
financial crisis 2008-9
 
Implications of switching to a relative
poverty measure in Malaysia
 
Using the absolute poverty measure 
25%
 of the reduction in
poverty has been due to falling inequality.
Switching to the (weakly) relative poverty measure, 
43%
 is
attributed to the reduction in inequality.
(
100%
 for the strongly-relative measure.)
 
47
 
Toward better 
public
 data for studying
poverty and inequality in Malaysia
 
Over the last 25 years the govt. stats offices of most
developing countries have implemented protocols for public
access to complete micro data from the main national
household surveys.
Malaysia is an exception.
This is constraining economic and social research on Malaysia.
Many applications, including to policy, require 
access to the
complete micro data
.
This also enhances the credibility of the data. Interaction with
users is an important channel for improving the surveys in the
future.
Public data access should be a high priority going forward.
 
48
 
Part B: How can we do better?
 
49
 
Two challenges ahead
 
Motivational challenge
: Should we care about inequality
and relative poverty as well as absolute poverty?
The intrinsic (ethical) and instrumental arguments for why
we need to also worry about inequalities.
 
Policy challenge
: How might we have greater success
against inequality?
Poor performance of current policies esp., in developing
world; objectives and constraints on better policies; policy
options.
 
50
 
Why do we also care about inequality?
 
“Inequality” is too big a word! Needs to be un-packed to
inform public action.
Ethical concerns about:
fairness of processes
, such as unfair trades, restricted
mobility
unequal opportunities in life
, esp.
 
from conditions of birth
unequal 
outcomes
 in life; utilitarian objections and/or
implications for the next generation
objectionable 
specific inequities 
(ethnic, gender,
geographic) especially if due to 
discrimination
.
 
 
51
 
 
Why do we care? 
Costs of inequality
 
High inequality threatens prospects for future economic
growth, and dampens the impact of growth on poverty.
Credit constraints facing the poor and middle class.
Political impediments to reform and public good provision.
Social costs of higher crime, weaker social cohesion.
Countries starting out with high inequality have a 
harder time
growing their economy
, and a harder time assuring that their
growth is 
pro-poor
.
 
52
 
Policies to help assure pro-poor growth
 
53
 
Economic growth and inequality
 
Growth has been roughly distribution neutral on average
Falling inequality in some growing economies and in some
periods (Indonesia 1970-90)
But rising in other countries/periods (Indonesia since late-
1990s).
Growth has been the main 
proximate
 source of progress
against 
absolute
 poverty.
But very mixed evidence that it helps much against relative
poverty or relative inequality.
And growth tends to come with higher absolute inequality.
Some degree of redistribution may be good for growth in
market incomes and can also finance pro-poor policies.
Making markets work better for poor people is also key.
 
 
 
 
 
 
 
54
 
55
 
How to achieve more pro-poor growth?
 
Literature and policy discussions point to the need to:
Develop human and physical assets of poor people =>
quality services
Make markets work better for poor people (credit, labor,
land)
Remove all negative discrimination (race, gender)
Remove biases against the poor in public spending,
taxation, trade and regulation
Invest in local public goods/infrastructure (not neglecting
poor areas) + agriculture and rural development
Remove restrictions on migration (between and within)
Foster labor absorption from urban economies, esp., small
and medium sized towns
 
Human development and inequality
 
Socio-economic gradients in
schooling and health care
everywhere help perpetuate
poverty and inequality across
generations.
Generalized gains in schooling
can be inequality increasing
initially; need for focusing on
poor families.
 
56
 
Log earnings are linear in years of schooling. So earnings
inequality rises with extra schooling in poor countries.
For a country such as 
Indonesia
, education expansion
(quality and quantity) tends to be pro-poor.
 
Schooling gap: rich - poor
 
Redistributive policies to complement
pro-poor growth
 
57
 
Lessons from the advanced economies
 
Fiscal incidence studies suggest that redistributive policies—
mainly taxes and transfers—have reduced inequality
substantially (OECD, IMF).
Average Gini for market incomes = 0.49
Average Gini for disposable income = 0.31
(Though redistributive effort has not typically increased
with the higher inequality of market incomes since mid-
1990s.)
The types of policies have varied over the history of the
(current) advanced economies, in line with
administrative capabilities and aggregate resources.
 
58
Rising use of direct interventions in the
developing world
Two main forms:
1.
Direct non-contributory income transfers to poor or vulnerable
families; with or without 
conditions
.
2.
Workfare schemes use work requirements for targeting.
Today almost every developing country has at least one such
program, though often with limited coverage.
Roughly 
one billion 
people currently receive assistance.
59
 
But are these interventions reaching the poor?
Uneven coverage of poor people
Only about one
third of those in
the poorest
quintile are
receiving help
from SSNs.
And worse
performance in
poorer countries
.
Indonesia is doing
relatively well.
60
The share of the poorest 20% receiving help from the social
safety net (SSN) programs in developing countries.
Source
: WB’s ASPIRE data set 
SSN=N
on-contributory transfers targeted to poor and vulnerable people.
 
Very low coverage of the
poor in poorest countries
 
Some poor countries
are doing well
 
One billion poor;
one billion SSN recipients
 
Living in poverty
 
Receiving help
from SSN
 
61
 
But mostly not the same people in poor countries!
 
Less poor countries tend to be better at
reaching their poor by these policies
 
62
 
Reaching the poorest?
 Social assistance lifts
mean floor by only 1.5 cents a day
 
Social spending lifted the floor by $0.48 per person per day on
average, well below the mean spending per capita of $0.88 a
day.
This is worse than a UBI.
The bulk of this impact is due to social insurance; social
assistance on its own only lifts the floor by 
1.5 cents per day
on average!
This is less than 10% of mean spending on social assistance.
 
63
 
Is it spending more
or spending better
that lifts the floor?
 
64
 
 
r=0.751
 
The bulk (77%) of the variance is due to variance in 
levels of
social spending 
rather than the efficiency of that spending.
 
Countries that
spend more on
social protection
tend to have a
higher floor
 
Richer countries have a higher floor
 
This reflects both
higher social
spending in richer
countries, and a
direct effect at
given spending.
 
65
 
 
The bulk (74%=0.686/0.923) of the effect of economic
development on the floor is 
direct
, via the pre-transfer floor
 
A new role for redistributive interventions,
but many challenges ahead
 
Success against relative poverty and in raising the floor will
almost certainly require 
more effective redistributive policies
.
Constraints include information, incentives, financing and
political economy. 
Administrative capacity 
is key.
High marginal tax rates on the poor must be avoided; 
poverty
traps
 due to fine targeting.
Information constraints 
can be severe. Reliable fine targeting
is rarely feasible in practice in developing economies.
Method of 
financing
 is key to overall impact.
 
66
 
 
A menu of current policies
 
Public services (health, education, security)
Targeted or universal
Cash transfers
Targeted, state-contingent) or universal
Conditional (e.g., PKH) or unconditional
Microfinance
Mixed record
Workfare schemes
Costs, including to the poor
Assets of value to poor people
Minimum wage rate (if enforceable)
Progressive income tax
Stronger tax enforcement on companies and the rich
 
67
 
A policy to consider more seriously,
for both pro-poor growth and redistribution
 
Basic full income
Universal; all citizens (“poor” or not)
Cash 
plus
 imputed values of key in-kind services (health,
education)
Cash accumulates in an account for children until age 18 (say)
Financed by cutting other subsidies and programs that bring
little benefit to the poor
+ progressive income tax when administratively feasible
Supportive ID system (e.g., 
Aadhaar
 in India, but privacy
concerns need to be addressed).
 
68
 
Six recommendations for better
policy making
 
69
 
Beyond slogans
 
“Tax the rich more”
“Spend less on rich people”
“Spend more on poor people”
“Target spending to the poor”
“Rely on local participation”
 
70
 
Recommendation 1: Policies must be
tailored to the realities of the setting
 
Successful policies respect local constraints on the
information available, administrative capabilities and
incentive constraints.
A key role for analysts is to learn about these constraints and
make them explicit.
Too often policy making is done in the absence of a proper
understanding of these constraints, which makes for bad
policies.
 
71
 
Recommendation 2: Tap local information
but with effective state support
 
Tapping local information can help identify those in need, and
help in responding, but it must be combined with strong
governments.
We have seen greater use of participatory, community-based
(governmental and non-governmental), institutions for
income support and/or service provision.
However, these should not be seen as substitutes for 
strong
public administration
, which will still be needed in guiding and
monitoring local institutions, including addressing grievances.
 
72
 
Recommendation 3: Focus on poverty
reduction not finer “targeting” 
per se
 
Excessive emphasis on reducing 
inclusion errors
, but leaving
high exclusion errors
.
The most finely targeted policy (lowest inclusion errors) need
not have the most impact on poverty
o
Information problems; measurement errors
o
Proxy means tests are often poor means tests, esp., poorest
o
Hidden costs of participation
o
Adverse incentives: high marginal tax rates => poverty traps
o
Political economy; concerns about undermining social
support/political consensus
 
 
 
73
 
Recommendation 4: Improve the
protection-promotion trade-off
 
Yes, there can be a trade off, though it is often exaggerated.
Transfers have a role in allowing markets to work better from
the perspective of poor people.
“Smart,” “Social investment,” approaches (CCT and productive
workfare) show promise. But assessments must consider all
the costs and benefits and avoid 
paternalism
.
Greater flexibility is needed in responding to 
shocks
.
Participant capture is a common problem. Also local moral
hazard.
Don’t be too ambitious: 
administrative capacity 
is a key
constraint in practice.
 
 
Recommendation 5: Monitoring and
evaluation are crucial
 
There are persistent knowledge gaps about the effectiveness
of this class of policies.
In addressing those gaps, generalized preferences among the
methodological options are rarely defensibly in the absence of
knowledge about the setting, and (especially) the data that
are available.
There is a 
menu of defensible options
.
It is no less important that policy makers are active in
identifying 
key knowledge gaps
, and/or supporting the
creation of relevant knowledge.
 
75
 
Recommendation 6: Learn from mistakes
 
Policy makers must also adapt to evidence of failure,
admitting and learning from mistakes as well as scaling up
successes.
Too often, it seems, deficient programs survive well beyond
their useful life.
Bureaucratic inertia and participant capture appear to be
common problems.
The NGO 
GiveWell
 has a page on its website devoted to
acknowledging its own mistakes (the first listed of which was
not hiring a PhD economist, which the NGO is in the process
of correcting at the time of writing).
Citizens should demand that governments do the same.
 
76
 
77
Thank you for your attention!
Terima kasih kerana memberi perhatian!
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In a public lecture at the University of Malaya, Martin Ravallion discussed the rising global inequality trends and potential policy responses. He highlighted shifts in global relative inequality since 1990 and variations in inequality levels within countries. Despite rising inequality in some nations, there has been a decline in absolute poverty. The presentation also noted the importance of understanding both received wisdom and dissenting views on income inequality for crafting effective policies.


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  1. Public Lecture, Ungku Aziz Center for Development Studies, University of Malaya, January 29 2019 Income Inequality: Challenges for Measurement and Policy Martin Ravallion 1

  2. Inequality is getting much attention globally Part A: How are we doing? Received wisdom + dissenting views Global perspective + Malaysia Part B: How can we do better? Objectives and constraints; policy options Recommendations for thinking about better policies. 2

  3. Part A: How are we doing? First, the received wisdom 3

  4. A (super) short history of global inequality Rising global inequality from 1820 to about 1990. Driven mainly by divergent growth processes: today s rich world takes off from the early C19th (though some late starters). The pattern changed dramatically toward the end of the C20th. Falling global relative inequality in the new Millennium. Driven by convergent growth processes, esp., high growth in Asia. 4

  5. Global relative inequality since 1990 1.0 Total global inequality 0.8 Inequality between countries 0.6 Theil index 0.4 Inequality within countries 0.2 0.0 1988 1992 1996 2000 2004 2008 2012 Source: Francois Bourguignon, Globalization and Inequality. Princeton University Press, 2016 5

  6. Rising inequality within many countries, but not all Average inequality within countries has edged upwards since 2000. Famous examples of US, China (though signs of stabilization) and India. Also some newcomers; e.g., Indonesia But also falling inequality in some countries (Brazil, Malaysia). Signs of (slow) inequality convergence: inequality tends to rise when low, fall when high. All this assumes anonymity. Rising inequality based on cross- sectional surveys is consistent with convergent income changes in longitudinal data. Indeed, often observed. 6

  7. Yet falling absolute poverty The most common approach to poverty measurement sets a line with constant real value over time and space Falling % (and number of) poor in developing world as a whole and many countries, including Malaysia. .6 60 Malaysia (official poverty measures) Headcount index ("poverty rate") in % Developing world (World Bank) Headcount index of poverty ($1.90) .5 50 .4 40 .3 30 .2 20 .1 10 .0 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 0 1970 1980 1990 2000 2010 2020 7

  8. Globally, economic growth typically comes with lower absolute poverty rates .3 .2 (annualized change in log H) Growth rate in poverty .1 .0 -.1 Slope = -2.2 (s.e.=0.27) -.2 -.3 -.4 -.10 -.08 -.06 -.04 -.02 .00 .02 .04 .06 .08 .10 .12 Growth rate in mean Source: Martin Ravallion, The Economics of Poverty: History, Measurement, Policy. Oxford University Press, 2016 8

  9. Malaysia 9

  10. Growth incidence curve for Malaysia, 1984-2016 Growth rate of household income per capita 4.0 3.5 Annualized over 1984-2016 3.0 Median Mean 2.5 2.0 1.5 Growth incidence curve 1.0 0.5 0.0 0 10 20 30 40 50 60 70 80 90 100 Percentile of income per capita Source: Martin Ravallion, Ethnic Inequality and Poverty in Malaysia, Working Paper, 2019. 10

  11. Malaysia: poverty rates by ethnicity 70 National Bumiputera Chinese Indian 60 50 Poverty rate (%) 40 30 20 10 0 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 Source: Martin Ravallion, Ethnic Inequality and Poverty in Malaysia, Working Paper, 2019. 11

  12. Malaysia: Long-run decline in inequality .6 Gini index of household income inequality .5 .4 .3 .2 .1 .0 1970 1980 1990 2000 2010 2020 Source: Martin Ravallion, Ethnic Inequality and Poverty in Malaysia, Working Paper, 2019. 12

  13. Ethnic convergence 1.6 Ratio of group mean to national mean 1.4 Chinese 1.2 Indian 1.0 Bumiputera 0.8 0.6 0.4 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 Source: Martin Ravallion, Ethnic Inequality and Poverty in Malaysia, Working Paper, 2019. 13

  14. Falling inequality within ethnic groups .60 National Bumiputera Chinese Indian Gini index for household incomes .56 National .52 Chinese .48 B'putera Indian .44 .40 .36 .32 1960 1970 1980 1990 2000 2010 2020 Source: Martin Ravallion, Ethnic Inequality and Poverty in Malaysia, Working Paper, 2019. 14

  15. Bulk of the fall in absolute poverty is due to growth, though falling inequality helped Falling inequality has meant that economic growth has had a larger impact on absolute poverty. Elasticity of poverty rate to mean of -3.6. This would have only need -2.2 without the fall in overall inequality. Elasticity of poverty rate to Gini index (holding mean constant) was 9! Decomposition of change in log poverty rate (1984-2015): 75% isdue to rising mean income. 15

  16. The received wisdom is out-of-step with some popular thinking 16

  17. Three things are missing from the way economists think about inequality 1. Absolute inequality matters 2. The poorest matter 3. Relative income matters 17

  18. 1. Wake up call to economists: Many people care about absolute inequality, and they care about the extremes 18

  19. Absolute versus relative inequality Relative inequality is measured using the ratios of incomes relative to overall mean. Absolute inequality is about the absolute differences the gap between rich and poor. Absolute inequality matters more to many people. Which is more unequal? State A: (1, 2, 3) State B: (2, 4, 6) Over half the students (n=450) say State B has higher inequality. Similarly for my Twitter survey (n=250). Yet most (relative) inequality measures (such as Gini index) say that there is no difference. 19

  20. Debates on inequality are often debates between absolutists and relativists Perceptions on the ground often differ to the numbers quoted by economists and statisticians! Serge Kolm and the May 68 ers : Grenelle agreement gave same relative gain (13%) to all. Many felt this was inequitable. At local level in developing world, absolutist NGO see rising inequality but relativist economist sees constant or even falling inequality. Neither is wrong: Just different axioms of inequality measurement (scale-invariance vs translation invariance). 20

  21. Falling relative inequality but rising absolute inequality globally Two Gini indices 1988 2008 Income gaps are normalized by the current mean Relative Gini (scale invariance) 0.72 0.71 Income gaps are normalized by a fixed mean Absolute Gini (translation invariance) 0.72 0.90 Source: Martin Ravallion, Globalization and Inequality, Journal of Economic Literature, 2018. 21

  22. Malaysia: Falling relative inequality, but rising absolute inequality Gini index of household income inequality 2.4 Absolute Gini 2.0 1.6 1.2 0.8 0.4 Relative Gini 0.0 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020 Source: Martin Ravallion, Ethnic Inequality and Poverty in Malaysia, Working Paper, 2019. 22

  23. 1.6 Ratio of group mean to national mean Malaysia: Ethnic convergence is relative, not absolute 1.4 Chinese 1.2 Indian 1.0 Bumiputera 0.8 0.6 0.4 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 Absolute gap in household income (2010 prices) 2,400 Chinese - Bumiputera 2,000 1,600 Chinese - Indian 1,200 Indian - Bumiputera 800 400 0 1960 1970 1980 1990 2000 2010 2020 23

  24. Rising inequality in growing economies? Relative inequality (Kolm s rightist Gini index) Absolute inequality (Kolm s leftist Gini index) (annualized difference in log absolute Gini index) (annualized difference in log relative Gini index) r=0.90 .06 .10 Growth in relative inequality Growth in absolute inequality .04 .05 .02 .00 r=0.18 .00 -.05 -.02 -.10 -.04 -.06 -.15 -.10 -.08 -.06 -.04 -.02 .00 .02 .04 .06 .08 .10 .12 -.10 -.08 -.06 -.04 -.02 .00 .02 .04 .06 .08 .10 .12 Growth rate in the mean (annualized difference in logs) Growth rate in the mean (annualized difference in logs) Source: Martin Ravallion, The Economics of Poverty: History, Measurement, Policy. Oxford University Press, 2016 24

  25. The dilemma for absolutists! The tendency for absolute inequality to rise with growth points to a trade-off between reducing absolute inequality and reducing poverty. Those who see inequality as absolute, and give high priority to reducing it, may well find themselves living in an absolutely poorer world. Greater clarity is needed on what trade-offs one is willing to accept between reducing absolute inequality and reducing absolute poverty. 25

  26. Nor is the transfer principle universally accepted Pigou-Dalton transfer principle: mean-preserving transfers from rich to poor reduce inequality This seems very sensible. However, a sizeable minority of my students and Twitter respondents think that (2, 5, 5, 10) is more unequal than (2, 4, 6, 10). Yet almost all think that (2, 4, 6) is more unequal than (3, 4, 5). Why? People look at the high and low ends of the distribution. How far are the extremes from the middle? 26

  27. 2. An important aspect of inequality: Are the poorest left behind? 27

  28. Conflicting views The poorest of the world are being left behind. We need to reach out and lift them into our lifeboat. U.N. Secretary- General Ban Ki-moon, 2011 Poverty is not yet defeated. Far too many are being left behind. Guy Ryder, ILO Yet economists appear to tell a very different story. Adages such as a rising tide lifts all boats or claims that growth is good for the poor or that there has been a breakthrough from the bottom How can we understand such different claims? 28

  29. Counting poor people may miss what is happening to the poorest Cumulative % of population Cumulative % of population Rising floor Measure of welfare Measure of welfare Poverty line Poverty line Floor stays put Poorest left behind Same reduction in the incidence of poverty but without leaving the poorest behind 29

  30. Yes, the poorest have been left behind! Fewer people living near the floor, but little change in the floor Absolute gain 1981-2011 ($ per person per day) 100 12 1981 80 Percent of the population 60 2011 10 40 20 8 0 -20 Difference (2011-1981) 6 -40 0 2 4 6 8 10 12 14 16 18 20 Consumption or income per person ($ per day, 2005 prices) 4 2 Near zero gain at bottom 0 0 10 20 30 40 50 60 70 80 90 100 Percentile Source: Martin Ravallion, Are the World s Poorest Being Left Behind? Journal of Economic Growth, 2016 30

  31. ? Globally: Branko s Elephant or Martin s serpent? 70 80 Absolute real gain 1988-2008 ($/person/day) Real income change 1988-2008 (in percent) 70 60 60 50 50 40 30 40 20 10 30 0 0 10 20 30 40 50 60 70 80 90 100 Percentile of the global income distribution 20 10 0 0 10 20 30 40 50 60 70 80 90 100 Percentile of the global income distribution Source: Martin Ravallion, Globalization and Inequality, Journal of Economic Literature, 2018. ( Branko selephant refers to a graph in Branko Milanovic, Global Inequality, Harvard, 2016) 31

  32. Malaysias absolute growth incidence curve 2.0 $ per day per person per year 1.6 Absolute income gain 1.2 0.8 0.4 0.0 0 10 20 30 40 50 60 70 80 90 100 Percentile of household income per capita 32

  33. Much less progress in raising the consumption floor globally Mean consumption in $ per person per day Overall mean 9 8 7 6 5 No sign that the new Millennium raised the floor 4 3 2 (about $1.00 in 2011 PPP) Floor 1 0 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 Source: Update to Ravallion, Are Poorest Left Behind? J. Econ. Growth, 2016. 33

  34. Malaysia has made somewhat more progress in raising the floor Mean or floor ($ per person per day; 2011 PPP) 30 $27.95 Overall mean household income per capita 25 20 15 $12.45 10 Floor(based on weighted mean income of the poor) 5 $3.00 $2.30 0 1984 1988 1992 1996 2000 2004 2008 2012 2016 Note: Poverty line = $4.00 at 2011 PPP (20% poverty rate in 1984) 34

  35. 3. Relative income matters to perceptions of poverty 35

  36. Ungku Aziz on relative poverty Royal Professor Ungku Aziz is famous for his Sarong index (# sarongs per persons over 1 year) This is presumably absolute. But Aziz also recognized that the idea of poverty is relative. Aziz s thought experiment: Imagine people living on a remote tropical island. Adequate food and shelter. No inequality. No sense of poverty. The problem would begin when someone from the island visited Singapore or Sydney and then became aware of what was lacking in the level of living of the island people .The main point here is that poverty is a relative notion based on material inequality. (Aziz, p. 1375) Ungku Aziz, 1964, Poverty and Rural Development in Malaysia, Kajian Ekonomi Malaysia, 1(1):75-105. Reprinted in Ungku Aziz Collected Papers, Vol. 3, Kuala Lumpur 2017. 36

  37. Poverty is absolute in the space of welfare Poverty measures that use a constant real line do not take account of the concerns people face about relative deprivation and social exclusion. These are specific to place and time. An overriding principle: poverty is absolute in the space of welfare: an absolute approach in the space of capabilities translates into a relative approach in the space of commodities (Amartya Sen, 1983). Clearly an absolute measure is not welfare consistent if people care about relative income (or it => capabilities). But (as we will see) strongly relative lines are also problematic. 37

  38. Relative income matters! Two ways relative income matters: 1. Relative deprivation: a person s well-being depends on both own-income and income relative to social comparators. 2. Costs of social inclusion rise with average income. Famously, Adam Smith pointed to the social-inclusion role of a linen shirt in eighteenth century Europe: ..a creditable day-labourer would be ashamed to appear in public without a linen shirt, the want of which would be supposed to denote that disgraceful degree of poverty which, it is presumed, nobody can well fall into without extreme bad conduct. Anthropologists have often noted the social roles played by festivals, celebrations, communal feasts, clothing. 38

  39. Weakly vs. strongly relative lines Poverty line Weakly relative Strongly relative Absolute (0,0) Mean income Social inclusion cost for poorest; e.g., Adam Smith s linen shirt, which costs just as much for the poorest. 39

  40. The key issue in measuring relative poverty: the elasticity of the poverty line A strongly relative line has an elasticity of unity (one); if the mean increase by 10% say then the poverty line increases by 10%. If all incomes grow at the same rate then poverty measure is unchanged. By contrast, a weakly relative line has an elasticity less than unity. The ratio of the poverty line to the mean falls as the mean rises. Naturally then, relative poverty is less responsive to overall economic growth. 40

  41. Growth is a less important proximate cause of uneven progress against relative poverty .5 .4 (annualized difference in log H) .3 Growth rate in poverty .2 .1 .0 Relative poverty (slope=-0.43; se=0.05) -.1 -.2 Absolute poverty (slope=-2.25; se=0.27) -.3 -.4 -.10 -.08 -.06 -.04 -.02 .00 .02 .04 .06 .08 .10 .12 Growth rate in mean Elasticity of absolute poverty to growth in mean = -2.2. Elasticity of (weakly) relative poverty to mean = -0.4. 41

  42. Is Malaysias official poverty line credible? Fixed in real terms over 40 years, despite substantial progress in raising average living standards. Frequent claims in the media that the poverty line is too low by today s standards. 42

  43. Malaysias official poverty line is lower than expected given current mean income Malaysia s poverty line made sense in the 1970s. But it is well below international standards today. Expected line of about $12 rather than $4.* 24 Poverty line ($ per person per day; 2011 PPP) Slovenia 20 16 Lebanon Lithuania Czech Hungary 12 Uruguay Slovak Rep. Poland Belarus Estonia B&H GuHonduras Venezuela Az Fiji Costa Rica Latvia Mont. 8 Panama ES Paraguay Colombia Sb Iraq Ym Egypt Brazil Kyrgyz SL OMalaysia Chile 4 Haiti Benin CAR Ecuador Turkey Argentina ($4, 3.33) Sn. Bhutan South Africa Botswana Namibia China Liberia DRC India CI Madagascar Rwanda Uganda 0 -0.4 0.0 0.4 0.8 1.2 1.6 2.0 2.4 2.8 3.2 3.6 Log mean ($ per person per day; 2011 PPP) Source: Ravallion, Martin, and Shaohua Chen, 2018, Welfare-Consistent Global Poverty Measures, NBER Working Paper 23739. 43

  44. Poverty line Illustrative example for Malaysia Mean Weakly relative line is more in line with the international experience in countries with similar average income. Slope = 0.33; Intercept =$2.50 ( hard core poverty line ). Intercept Slope Line in 1984 Line in 2015 Overall elasticity Absolute $4.00 0 $4.00 $4.00 0 Weakly relative $2.50 0.33 (1/3) $5.61 $11.82 0.62 44

  45. Absolute and (weakly) relative poverty in Malaysia 50 Poverty rate (% of population) Weakly relative poverty (Intercept=$2.50; slope=1/3) 40 30 20 Absolute poverty ($4 per person per day) 10 0 1982 1986 1990 1994 1998 2002 2006 2010 2014 Source: Author's calculations using stipulated poverty line and PovcalNet

  46. Warning against strongly relative lines Strongly relative shows falling poverty during global financial crisis 2008-9 Poverty rate (% of population) 40 30 Strongly relative Weakly relative 20 10 0 1984 1988 1992 1996 2000 2004 2008 2012 2016 Weakly relative: $2.50 + one third of current mean Strongly relative: 50% of current mean 46

  47. Implications of switching to a relative poverty measure in Malaysia Using the absolute poverty measure 25% of the reduction in poverty has been due to falling inequality. Switching to the (weakly) relative poverty measure, 43% is attributed to the reduction in inequality. (100% for the strongly-relative measure.) 47

  48. Toward better public data for studying poverty and inequality in Malaysia Over the last 25 years the govt. stats offices of most developing countries have implemented protocols for public access to complete micro data from the main national household surveys. Malaysia is an exception. This is constraining economic and social research on Malaysia. Many applications, including to policy, require access to the complete micro data. This also enhances the credibility of the data. Interaction with users is an important channel for improving the surveys in the future. Public data access should be a high priority going forward. 48

  49. Part B: How can we do better? 49

  50. Two challenges ahead Motivational challenge: Should we care about inequality and relative poverty as well as absolute poverty? The intrinsic (ethical) and instrumental arguments for why we need to also worry about inequalities. Policy challenge: How might we have greater success against inequality? Poor performance of current policies esp., in developing world; objectives and constraints on better policies; policy options. 50

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