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Inequality and

Human
Development
Maria Ana Lugo
University of Oxford
20
th
Sept 2004
maria.lugo@economics.ox.ac.uk
2
Purpose

To present key issues (debates) around


inequality

To explore methodologies to compare


distributions

To analyse how much HDI incorporates


(or can incorporate) inequality
3
Outline
1. Initial Remarks definitions
2. Issues on Inequality
3. Why does inequality matter?
4. Methods
5. Inequality and HDI
6. Example (Arg)
4
1. 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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2. 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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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


3. 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 => social stability,
instrumental and direct welfare reasons
International unw International w World
Source National accounts National accounts Household surveys
Unit of analysis Country Country Individuals
Welfare concept GDPpc GDPpc Mean pc income
National currency Market ER or PPP ER
Within-country Ignored Ignored Included
Measure: relative or absolute

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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?
One x
or
many xs?
UNI-
DIMENSIONAL
MULTI-
DIMENSIONAL
1. Indices
(real #)
2. Orderings
(CDFs, LC)
Item-by-Item Aggregative Non-aggreg
2 step MD Indices
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4. How do we compare two
distributions?
UNIDIMENSIONAL
1. 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) => 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 => clear representation
-
Can be easily computed from normally available data (%pop/
%income)
But
-
Not decomposable (between- and within-groups)
2
1 1
1
2 ( )
n n
i j
i j
Gini y y
n y

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4. How do we compare two
distributions?
Other two relative measures

GE measures: from Theory of Information


weight to changes at different parts of the distribution. The lower the ,
the more sensitive to the lower part.
-
When =0 Theils mean log; When =1 Theil index (equal weight);

Atkinson index: includes subjective elements


: parameter of inequality aversion, explicit choice of weights to changes
at different parts of the distribution. The higher the , the more weight to
the lower part
1/ (1 )
1
1
1
( )
i
x
I
n x

1
_
1

1 ,
]

1 1
1
(1 ) ( )
i
x
GE
n x


1
_
1

1 ,
]

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4. How do we compare two
distributions?
Formula Mean
Indep
Pop indep Pigou-
Dalton
Decomposability Transfer sensitivity. Others
Range
R =

i i
Y Min Y Max


X
Ignores inside the extremes
Variance
V =
n
Y
i

2
) (

X

Relative Mean Deviation
M =
1
i
Y
n



X
Not sensitive to transfers among same
side of the mean income.
Gini Coefficient
G =
2
1
2
i j
j i
Y Y
n




X
Sensitive to centre of distrib depends
on # people between. Not incomes.
Standard deviation of logs
H =
2 / 1
2
log log
1
1
]
1

,
_

n
Y


X (might
violatefor very
high income)
More sensitive for transfer in the lower
end. Not defined for zero income
earnings
GE measures
GE
?
=

1
1
]
1

,
_


i
Y
Y
n
1
1
) 1 (
1

Depending on
Theil second = 0
L =

i
Y
Y
n
log
1

Very sensitive to lower end. Not
defined for zero income values
Theil index = 1
T =

Y
Y
Y
Y
n
i i
log
1

Sensitive to lower end
Coefficient of Variation = 2
GE
2
=
( )
2
2
1
CV
; CV =

V

Transfer neutrality, equally sensitive to
all income transfers
Atkinson ()
A
?
=

/ 1
1
1
1
1
]
1

,
_

Y
Y
n
i


X
Depending on

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4. How do we compare two
distributions?
2.Orderings (CD)
Lorenz Curves (1905)
Atkinson (1970): LC if do not cross, then any measure
satisfying above axioms would rank distributions equally
=> we do not have to worry about which one to use

Percentage of Population
(y)
Percentage
of Income
Line of Perfect
Equality (LPE)
Lorenz Curve
L(y) - LC
0
1
1
F (y)
B
A
A
Gini
A B

+
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4. How do we compare two
distributions?

But if they cross? => We cannot conclude anything


unambiguously (incomplete ordering)
-
Either we choose some measure of inequality
=> 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
1. Item-by-item: each vle examined separately
UD methods (indices/orderings) + covariance/correlation analyses
2. Aggregative strategies: Collapsing dimensions

Two-step procedure: (1) well-being index (2) UD methods

Multidimensional measures of inequality


=> Complete ordering of distributions.
Decisions over: weighting (w), degree of substitution bt dimensions (),
and degree of inequality aversion.
HDI: chooses w: [1/3, 1/3, 1/3] and : 1 for all pair of attributes
3. 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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Advantages Disadvantages
ITEM-BY-ITEM

No problem of aggregation
(commensurability, choice of
w, )

Not easy to compare if


#dimensions increase

No account of MD aspect
at unit level (only corr)
AGGREGATIVE

Summarises info, easy to
compare bt units

Gives complete ordering

Have to impose
assumptions (values) on
w, ,

Commensurability
(units), types of vles
NON-AGGREG

Deals with MD of unit

Not many assumptions of


parameters required

Difficult to implement

Problem of high # obs


required

Most probable, leads to


ambiguous conclusions
4. How do we compare two
distributions?
17
5. HDI and Inequality

Between-country inequality: HDI as a 1


st
step,
then apply UD indices

Within-country inequality: HDI components are


national averages => 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 Y
adj
=Y(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
G
x
: 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
[ ]
( )* 1
x x x
IA x G
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5. HDI and Inequality

Foster (2003): General Mean of Means (Atkinson Index)


Each x dimension
Aggregate components
-
Choose according to concern for inequality higher 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)
[ ]
1
1 1
1
( ) ( ) 1 ( )
i
i
x
x x I x
n



1
1

1
1
]

[ ]
1 1 1 1
( ) ( ), ( ), ( ) H D x y z


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5. HDI and Inequality
Related questions
-
Should be the same for all dimensions? (see
Anand 2003) bc of nature of the dimension and
of the indicator used
-
How should be choose ?
-
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!)


Dimension Indicator Source
Income Per capita household income
(w regional cost-of-living adj)
PHS
(ENGH)
Health Life expectancy at birth Vital Statistics
Population Census
Education % adult population with at
least Complete primary
Population Census

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6. Results
Income

1991
f
2001

Stoch dom and measures 1991f 2001
Health (LE)

2001
f
1991

Stoch dom and measures 2001f 1991
Education

2001
f
1991

Stoch dom and measures 2001f 1991
Item- by-item

Income distr worsen
Health and educ distr improved
NB: Low values of ineq (not sign different). Between-ineq is relevant

Stoch dom and measures 2001f 1991 Maasoumi
(1 w, 4 , 2 )
Different result from income distribution

Aggregative
Strategies
Bourguignon
(1 w, 4 , range0 -1 )
Depends on values of and
if ? => 2001f 1991
if < => 1991f 2001
Two opposite 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 1
st
result: All measures imply assumptions
(embedded SWF) important to make them explicit and
understand them

Different measures might give different orderings of


distributions =>

Atkinsons 2
nd
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 []. 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)
26
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 Foundation;Clarendon 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
27
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/pages/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.