Inequality and Human Development

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Inequality and Human Development

• Maria Ana Lugo
• University of Oxford
• 20th Sept 2004
• maria.lugo_at_economics.ox.ac.uk

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Purpose

• To present key issues (debates) around inequality
• To explore methodologies to compare distributions
• To analyse how much HDI incorporates (or can
  incorporate) inequality

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Outline

• Initial Remarks definitions
• Issues on Inequality
• Why does inequality matter?
• Methods
• Inequality and HDI
• Example (Arg)

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Initial Remarks

• Inequality is like an elephant You cant define
  it, but you know it when you see it
• (Fields 2001, 14)
• The meaning of inequality encapsulating ethical
  concepts vs. statistical dispersion (distribution
  rather than inequality)
• Inequality, poverty and welfare. Related but
  distinct
• broader than poverty defined over the whole
  distribution, not only below a certain poverty
  line
• narrower than welfare if indep of mean, only
  concerned with the second moment (relative vs
  absolute measures)
• But 3 closely related, sometimes used in
  composite measures (e.g. Sens measure contains
  the Gini among the poor)

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Issues on Inequality

• WHY should we care about inequality?
• HOW do we compare distributions? (we always
  compare!)
• Empirical issues (dimensions, variables, unit of
  analysis, methods -indices and orderings-,
  between/within inequality)
• WHY is there inequality? ineq as output
• Theories to explain determinants factor share
  and market imperfections theories especially LM
  i.e. info asymmetries, efficiency wages,
  selection models
• Tools decompositions, vertical vs. horizontal
  inequality
• WHAT are the effects of inequality? ineq as
  input
• On growth, HD, poverty, conflict, democracy, etc

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Why does inequality matter?
.. every normative theory of social arrangement
that has at all stood the test of time seems to
demand equality of something something that is
regarded as particularly important on that
theory (Sen 1992, 12) equality of what?
space of equality Utilitarians, Rawlsians,
Nozicksean, and Senians egalitarian in some
space, anti-egalitarian in some other space.

• Inequality good or bad for (income) growth?
• INEQ-Levels Kuznets inverted U hyp
• INEQ to Growth HK Loss (-), Access to K mkt
  (/-), Efficiency wages (-), Savings (),
  political instability (-)
• Human Development effects on levels (of edu,
  health, others) achieved, political
  participation, etc.
• Poverty sensitivity of poverty to growth, effect
  of specific policies
• Social cohesion (Stewart) Horizontal Ineq (vs
  vertical) culturally defined groups gt social
  stability, instrumental and direct welfare reasons

• Because it is high and increasing! - Magnitude
  of the problem
• Maps
• World inequality increasing?
• International between countries
• National Within country-inequality
• World between within
• Because it is fair - Theories of justice
• Sense of justice and self-worth
• Because it affects dev/growth/HD/ democracy /
  social cohesion
• Mechanisms from inequality to variables

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4. How do we compare two distributions?

• It is generally agreed that, other things being
  equal, a considerable reduction in inequality of
  incomes found in most modern communities would be
  desirable.
• But it is not generally agreed how this
  inequality should be measured
• Hugh Dalton (1920)
• The measurement of the inequality of incomes
• Economic Journal, 1920, Vol. 30, p. 348
• Ineq of what and among whom?
• Variable/Indicator one or many? Which one(s)? If
  income, pre/post taxes includes profits of
  capital and land or not.
• Unit of analysis individuals, households,
  regions, countries (? recipient unit)
• Adjustments/corrections e.g. adult equivalent
  (eq scales), economies of scales, cost-of-living
  differentials (rural-urban, diff regions)

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4. How do we compare two distributions?
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4. How do we compare two distributions?

• UNIDIMENSIONAL
• Indices
• E.g. Gini coefficient, Theil index, Atkinson
  Index, 90-10 Ratio
• Which one shall we use?
• How do we choose between indices?
• Axiomatic approach desirable properties
• Anonymity, Scale Independence, Population
  Independence, Transfer Principle (Pigou-Dalton)
  gt M of Relative Inequality
• Others Decomposability, Transfer Sensitivity
• Ad hoc
• mathematical appeal (GE)
• neat statistical or graphical interpretation
  (Gini)

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4. How do we compare two distributions?

• Some measures
• Gini Coefficient most widely use inequality
  measure.
• Function of differences between every pair of
  inds income
• Ranges from 0 to 1
• It is a relative measure
• Has a close relation to Lorenz Curves gt clear
  representation
• Can be easily computed from normally available
  data (pop/income)
• But
• Not decomposable (between- and within-groups)

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4. How do we compare two distributions?

• Other two relative measures
• GE measures from Theory of Information
• a weight to changes at different parts of the
  distribution. The lower the a, the more
  sensitive to the lower part.
• When a0 Theils mean log When a1 Theil index
  (equal weight)
• Atkinson index includes subjective elements
• e parameter of inequality aversion, explicit
  choice of weights to changes at different parts
  of the distribution. The higher the e, the more
  weight to the lower part

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4. How do we compare two distributions?
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4. How do we compare two distributions?

• Orderings (CD)
• Lorenz Curves (1905)
• Atkinson (1970) LC if do not cross, then any
  measure satisfying above axioms would rank
  distributions equally
• gt we do not have to worry about which one to use

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4. How do we compare two distributions?

• But if they cross? gt We cannot conclude anything
  unambiguously (incomplete ordering)
• Either we choose some measure of inequality
• gt different measures might give us different
  answers, in fact, we are always able to find 2
  measure that disagree!!
• Or we leave the analysis at this point
• Is this bad? Sen argues instead of this being a
  drawback of LD criterion, it is in fact its
  greatest advantage, as it captures the essential
  ambiguity of the concept of inequality
• Ambiguity of inequality should be preserved
  rather than trying to remove it through some
  arbitrary completed ordering (Sen 1997, p. 121)
• NB LC for continuous (distributable) unbounded
  variables

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4. How do we compare two distributions?

• MULTIDIMENSIONAL
• Item-by-item each vle examined separately
• UD methods (indices/orderings)
  covariance/correlation analyses
• Aggregative strategies Collapsing dimensions
• Two-step procedure (1) well-being index (2) UD
  methods
• Multidimensional measures of inequality
• gt Complete ordering of distributions.
• Decisions over weighting (w), degree of
  substitution bt dimensions (ß), and degree of
  inequality aversion.
• HDI chooses w 1/3, 1/3, 1/3 and ß 1 for
  all pair of attributes
• Non-aggregative strategies
• Tests comparing MD distributions, as in UD
  ordering Kolmogorov-Smirnov and Pearsons tests.
  Not easy to implement, few studies

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4. How do we compare two distributions?
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5. HDI and Inequality

• Between-country inequality HDI as a 1st step,
  then apply UD indices
• Within-country inequality HDI components are
  national averages gt not included
• An intrinsic concern for inequality in human
  development requires adjustment of average
  achievements in each of the three dimensions (by
  the extent of measured inequality in each) as
  well as an accounting of the covariances in
  achievements along the different dimensions
  (Anand 2000 99)
• Only GDI including gender differentials
• 1991-94 HDR include YadjY(1 G)

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5. HDI and Inequality

• Should we include w-c inequality?
• Efficiency arguments variables as means to other
  ends, in a diminishing way. Thats why income in
  logs
• Equity arguments intrinsically valuable
• Basic problem type of indicators in HDI
• LE is probability-based group measure, not
  individual
• Literacy group measure () or individual (0-1)
  then no efficiency argument for a 0-1 variable
• Change indicators (for a continuous unbounded)
• Sub-group inequality (gender, location, race)
  municipalities though same for 3 attributes!

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5. HDI and Inequality

• How shall we include inequality?
• Hicks (1997) Extending HDR91-93 income (Sen
  Index)
• Each x dimension
• Gx Gini coefficient for component x
• Edu years of schooling / Health life-span
  attainment (age-at-death)
• BUT
• It is not group-consistent/decomposable, bc. Gini
  is not
• It depends on the ordering of aggregation across
  people and dimensions
• Also, Anand-Sens critique interpretation of
  reductions

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5. HDI and Inequality

• Foster (2003) General Mean of Means (Atkinson
  Index)
• Each x dimension
• Aggregate components
• Choose e according to concern for inequality
  higher e more weight to lower part of
  distribution (more aversion to inequality)
• Group-decomposable and sequencing-free
• Sensitive to inequality across dimensions
  (penalising uneven development, there is some
  substitutability but its not infinite)

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5. HDI and Inequality

• Related questions
• Should e be the same for all dimensions? (see
  Anand 2003) bc of nature of the dimension and
  of the indicator used
• How should be choose e?
• Substitutability between inequality across
  dimensions, but not between levels of components
  (valid ? also for HDI).

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6. Exercise Argentine provinces

• Objective Do multivariate distribution analyses
  contribute to the study of Argentine welfare
  inequality?
• Exercise
• Period 1991 vs. 2001
• Dimensions
• Units of analysis provinces
• Weights one province one observation (as in
  HDI!)

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6. Results
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Conclusions

• There are enough reasons to include distribution
  (inequality) issues in the analysis. But not
  consensus on how, even within UD.
• Be specific, demand specificity! Definitional
  issues are too serious to be left to footnotes or
  ignore altogether (AB 2000 14) Inequality OF
  WHAT (vle) AMONG WHOM (unit)?
• Atkinsons 1st result All measures imply
  assumptions (embedded SWF) important to make
  them explicit and understand them
• Different measures might give different orderings
  of distributions gt
• Atkinsons 2nd result Use LC criterion when
  possible
• Test robustness of results (diff
  measures/parameters)
• Or use one and give reason for choosing it over
  the others

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Conclusions

• Multidimensional inequality three strategies
  with adv and disadv.
• Also they imply taking many decisions
• There is an inescapably arbitrariness in the
  choice of ß. The right way to deal with the
  issue is to explain clearly what is being assumed
  so that public criticism of the assumption is
  possible (Anand 2003 218)
• Better than neglecting the issue altogether, as
  generally done, and focus solely on income
  distribution
• Again, use sensitivity analysis, results under
  different assumptions
• Statistical Inference for data derived from
  surveys, meaningful comparisons between estimates
  need include standard errors of the measures (not
  usually done)

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Reference

• Atkinson (1970) "On the Measurement of
  Inequality", Journal of Economic Theory, 2 (3)
  244-263.
• Fields, G. S. (2001), Distribution and
  development a new look at the developing world,
  New York, London Russell Sage Foundation MIT
  Press. Chapter 2 "The Meaning and Measurement of
  Income Inequality"
• Sen, A. K. (1992), Inequality reexamined, New
  York and Oxford Russell Sage FoundationClarendon
  Press. Chapter 1 "Inequality of what?"
• Sen, A. K., and J. E. Foster (1997), On economic
  inequality (Enl. / ed.), Oxford Clarendon Press.
  Chapter 2 "Measures of inequality"
• Sen, A. (2000), "Social Justice and the
  Distribution of Income" in Handbook of Income
  Distribution (Vol. 1), A. B. Atkinson and F.
  Bourguignon (eds), Oxford Elsevier Science, pp.
  59-85.
• Stewart, F. (2001), "Horizontal Inequalities A
  Neglected Dimension of Development", CRISE
  Working Paper 1, Centre for Research on
  Inequality, Human Security and Ethnicity (CRISE)
  and Queen Elizabeth House (QEH), University of
  Oxford, Oxford
• ON INEQ GLOBAL/WORLD
• Atkinson, A. B., and A. Brandolini. (2004),
  "Global World Inequality Absolute, relative or
  Intermediate?" presented at the 28th General
  Conference of The International Association for
  Research in Income and Wealth, August 22-28,
  Cork, Ireland.
• Bourguignon, F., and C. Morrisson. (2002),
  "Inequality among World Citizens 1820-1992",
  American Economic Review, 92 (4), 727-744

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Reference

• ON WHY INEQ Gral Theories of social justice and
  INEQ
• Atkinson, A. B., and F. Bourguignon. (2000),
  "Introduction Income Distribution and Economics"
  in Handbook of income distribution (Vol. 1), eds.
  A. B. Atkinson and F. Bourguignon, Oxford
  Elsevier Science, pp. 1-58.
• Milanovic, B. (2003), "Why we all do care about
  inequality (but are loath to admit it)", EconWPA
  /0404002, UNPUBLISHED.
• Sen, A. (2000), "Social Justice and the
  Distribution of Income" in Handbook of income
  distribution (Vol. 1), eds. A.-B. Atkinson and F.
  Bourguignon, Oxford Elsevier Science, pp. 59-85.
• ON INEQUALITY AND GROWTH, HD, POVERTY
• Kanbur (2004) Growth, inequality, and Poverty
  some hard questions at www.people.cornell.eduy/pa
  ges/sk145
• Kanbur, R. (2000), "Income Distribution and
  Development" in Handbook of income distribution
  (Vol. 1), eds. A. B. Atkinson and F. Bourguignon,
  Amsterdam New York and Oxford Elsevier Science,
  North-Holland, pp. 791-841.
• Fields, G. S. (2001), Distribution and
  development a new look at the developing world,
  New York, London Russell Sage Foundation MIT
  Press. Chapter 3 and 10.
• Stewart, F. (2000), "Income Distribution and
  Development", QEH Working Papers Series 37,
  University of Oxford, Oxford
• Stewart, F. (2001), "Horizontal Inequalities A
  Neglected Dimension of Development", CRISE
  Working Paper 1, Centre for Research on
  Inequality, CRISE and QEH, University of Oxford,
  Oxford
• Subramanian, S. V., and I. Kawachi. (2004),
  "Income Inequality and Health What Have We
  Learned So Far?" Epidemiologic Reviews, 26 78-91.

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Reference

• ON INEQ IN HDI
• Anand, S., and A. K. Sen (1995), Gender
  inequality in human development theories and
  measurement, New York United Nations Development
  Programme.
• Anand, S., and A. K. Sen. (2000), "The income
  component of the human development index",
  Journal of Human Development, 1 (1) 83-106.
  Also, printed in (1999) mimeo, New York UNDP
  Human Development Report Office.
• Anand, S., and A. K. Sen. (2003), "Concepts of
  human development and poverty a
  multidimensional perspective" in Readings in
  human development concepts, measures and
  policies for a development paradigm, eds. S.
  Fukuda-Parr and A. K. Shiva Kumar, New Delhi
  Oxford University Press, pp. 204-220.
• Foster, J. E., L. Lopez-Calva, and M. Szekely.
  (2003), "Measuring the Distribution of Human
  Development Methodology and an Application to
  Mexico" presented at the WIDER Conference on
  Inequality, Poverty and Human Well-Being, 30-31
  May, Helsinki, Finland WIDER.
• Hicks, D. A. (1997), "The Inequality-Adjusted
  Human Development Index A Constructive
  Proposal", World Development, 25 (8), 1283-1298.
• Anand, S. (2002), "The concern for equity in
  health", Journal of Epidemiology and Community
  Health, 56 (7) 485-487.
• Sen, A. K. (2002), Why health equity?, Health
  Economics, 11 659-666.