The defining challenge of our time 
In a December 4 2013 speech, Barack Obama referred to inequality as the “defining challenge of our time”; in an April 28 2014 tweet, the Pope declared inequality to be “the root of social evil”. According to a World Economic Forum survey, severe income disparity is one of the ten global risks of highest concern in 2014. Thomas Piketty’s book, Capital in the Twenty-First Century attracted considerable attention, particularly on this side of the Atlantic. By presenting a number of facts on inequality over the past 200 years, it forcefully documents the almost-uninterrupted increase in the concentration of wealth that took place within the wealthiest nations. An intense and often passionate debate ensued on what these facts meant for economic development in general and what policies were warranted. While the countries included in Piketty’s analysis are exclusively the wealthiest ones, one wonders about the extent to which these observations and the broader lessons derived from them are applicable to the developing world (Milanovic 2014).
Data are still limited for measuring inequality in developing countries. The main issue when trying to extend the discussion to the developing world is and has always been data availability. Extremely little data are available on wealth, so we focus exclusively on income inequality, but these data are still limited. In most low-income countries, household surveys are the main source of information about inequality. The coverage of these surveys has improved substantially over the last two decades. However, it remains limited in the Middle East where less than 50 percent of the regional population is represented by the surveys while in Sub-Saharan Africa, coverage reaches around 80 percent. One limitation with household surveys, in every setting, is their limited ability to capture the very top of the income distribution, in part because the very rich are more likely to under-report their income if they participate in the survey at all (Korinek, Mistiaen, and Ravallion 2007).[1] As pointed out in a recent blog post, with regards to developing countries, “[w]e are still ignorant about trends in the high income share in developing countries”.
On average global inequality within the developing world has fallen due to less inequality between countries. If the developing world is considered as one single country, inequality would be found to have declined between 1980 and 2010 (Ravallion 2014). Looking at the sources of this trend, overall inequality can be broken down into inequality within countries—inequality between citizens in a given country—and inequality between countries. The result of such a decomposition shows that the fall in total inequality is largely explained by a fall in the inequality between countries. On the other hand, within-country inequality increased steadily until the mid-1990s and has remained flat since. Analyses that look at both rich and poor countries together find similar patterns (see Lakner and Milanovic 2013). 
Within-country inequality across the world: a tale of many countries. Far from telling a uniform story, however, Figure 1 suggests that individual countries have had sharply different experiences vis-à-vis income inequality over the period 1988-2008.[2] For instance, inequality in Latin America, while still the highest in the world, has sharply declined in recent years. On the other end of the spectrum, China was markedly equal in 1988 and is now reaching levels close to today’s Latin American countries. In comparison, inequality in the rest of the developing world has remained roughly stable, at relatively low levels in the rest of Asia while substantially higher in Sub-Saharan Africa.
Shared prosperity varies across countries. A different take on the changing distribution of income over time, Figure 2 looks at how the income of the relatively poor (i.e., poorest 40 percent of the population) grew compared to the national average. In each of the panels (i)-(vi), each dot represents an individual country. The dotted line indicates the level at which the incomes of the poorest 40 percent grow at the same rate as the economy; a dot below the line indicates that their income grew less than the national average, while a dot above indicates it grew more. The fact that the data track this line somewhat indicates that the incomes of the lower 40 percent generally increase when overall growth is high. While panel (i) shows every country for which data were available, the discussion becomes more interesting when we look at each group of countries separately. Panel (ii) looks at rich countries and, consistently with Piketty’s findings, shows that in most of the rich countries in this period of 1988-2008, the poor have not benefitted as much from economic growth as the rest of the country. This is even more the case for China (label CHN), as panel (iii) illustrates. While the country as a whole grew at an average rate of 7.5 percent over the period 1988-2008, the bottom 40 percent of its population experienced a mere 4.3 percent growth rate. This is certainly in line with the earlier observation we made on the sharp increase in overall inequality in China. We also argued earlier that inequality fell in Latin America. Panel (iv) suggests that there is however substantial variation across countries within the continent. In particular, the poor in Brazil (BRA) grew significantly faster than the average, while in Venezuela (VEN), they suffered relatively less as the country contracted. Finally, echoing Dollar and Kraay (2002) who documented that “Growth is Good for the Poor”, a common pattern emerges whereby growth is indeed more likely to be inclusive for countries that experience higher growth in the first place.[3]
How much should we care about inequality? More striking also is the fact that countries differ more by how fast they have been growing over the period 1988-2008 than by how inclusive their growth was. This observation has prompted an on-going debate on whether inequality in the developing world is properly measured and whether or not inequality per se should be a source of concern in the first place. [4],[5] Apparently, that debate is not going to abate any time soon.
[1] The relatively recent literature on top incomes that makes use of tax records has therefore shed a complementary light on the evolution of income inequality over time (see World Top Incomes Database).
[2] We use the Gini Index as our measure of inequality. The Gini ranges from 0 to 100, where 0 would indicate that everyone’s incomes are equal (i.e., complete equality), while a 100 would mean that one person earned all the income, while everyone else earned none (i.e., complete inequality).
[3] This pattern is robust for the sample of all countries in the world but China.
[4] See Alvaredo and Gasparini (2013) and Lakner and Milanovic (2013), for example.
[5] See Dollar, Kleineberg, and Kraay (2014), Atkinson and Brandolini (2010), and Ravallion (2005), for example.
Quy-Toan Do is an economist in the Research Department of the World Bank. His research has looked at the relationship between economic and political institutions and the distribution of wealth. He has studied the implications of globalization for poverty and inequality. He holds a Ph.D. in economics from the Massachusetts Institute of Technology. He is a member of CREDO’s Advisory Panel.
Christoph Lakner works as an Economist (ETC) in the Development Research Group (Poverty & Inequality team) at the World Bank. He holds an MPhil and BA from the University of Oxford, where he is also completing a DPhil in Economics. His research focuses on inequality, in particular on issues related to global inequality, top incomes, and the implications for poverty reduction and economic growth.
