World Bank’s Approach To Equity Measurement

Paolo VermeWorld Bank and Department of Economics, University of Torino

“International Experts Conference on Measurement and Policy Approaches to Enhance Equity for the New Generations in MENA”

Rabat 22-23 May, 2012

Two questions and two puzzles

Q1) Would you like to reduce income inequality?

Q2) Would you like all incomes to be equal?

P1) So, what level of inequality would you like?

P2) Is there an optimal level of inequality?

Inequality and Equity

• Do people think about the Gini index when they talk about inequality?

• Or, do they think about equal treatment, equal rights, equal opportunities, fairness and justice?

• Inequality and inequity are two different concepts but easily confused

Definitions

• Inequality (equality) measurement: The quantitative measurement of distances between objects (incomes, heights or stars). The Gini coefficient was originally derived from astrophysics. The question asked is what is the combined distance between objects?

• Equity (inequity) measurement: The measurement of inequality under principles of fairness and social justice. The question asked is what is the difference between outcomes of people who have equal rights and make equal efforts?

The World Bank Approach• The WB has for long insisted on equity, not inequality • WDR (2006) Equity and Development, defines equity in terms

of fairness

• Inequality is not ignored. Poverty studies and Branko Milanovic work on world inequality, but few country studies focus on inequality per se

• Inequality reduction is not a policy goal

• Equity improvement is the policy goal

Why Equity Matters for Children (WDR, 2006)

Why Equity Matters for Children (WDR, 2006)

Equity Measurement – Recent Advances• Inequality of opportunities

– Roemer (1998)– WDR on Equity and Development, 2006– Recent World Bank work

• Relative deprivation– Runciman (1966), Yitzhaki (1979)– New indexes of relative deprivation– Recent World Bank work

• Perceptions of welfare– Happiness literature– Household Budget Surveys Vs. World Values Surveys– Recent World Bank work

Some recent examples of WB workWorldwide• Inequality of opportunity, various countries• Human Opportunity Index (HOI), LAC and other countries• Equitable distribution subsidies, various countries• Equitable distribution of social transfers, various countries• Health equity financing, various countries• Labor Opportunities in ECA

MENA• Gender equity in West Bank and Gaza• Labor Deprivation in Morocco• Perceptions of inequality in Egypt• Inequality of opportunities for Children in Egypt

Inequality of opportunity (Ferreira, F.)

Literature:• Rawls (1971) “A theory of justice”• Sen (1980) “Equality of What?”• Roemer (1998) “Equality of Opportunity”

Contents:• Circumstances Vs. Efforts• Ex-ante Vs. ex-post approach

– Ex-ante: inequality in the value of opportunity sets across types. Values the opportunity set of each individual but does not observe efforts

– Ex-post: inequality among people who exert the same degree of efforts. Does not value the opportunity set of each individual but observes efforts levels

Inequality of OpportunitySome Evidence (Ferreira, F.)

Inequality of OpportunitySome conclusions (Ferreira F.)

• Inequality of opportunity is possibly the most salient inequality concept in terms of its normative content: “bad inequality”

• It can be measured with respect to income or educational achievement, by ex-ante or ex-post approaches

• A review of the recent applied literature yields lower bound estimates from 2% (Denmark) to 50% (Guatemala)

Human Opportunity Index - LAC• The Human Opportunity Index (HOI) measures the percentage of available opportunities

needed to ensure children’s universal access to basic services and their equal allocation.

• The index ranges from 0 (absolute deprivation) to 100 (universality).

• The HOI for education includes two indicators: completion of sixth grade on time and school attendance for ages 10-14.

• The HOI for housing includes three indicators: access to water, sanitation, and electricity.

• The HOI for Latin American children has increased in the last decade for all basic opportunities

• Within each dimension (i.e. education and housing), the indicators have the same weight. In generating the composite HOI, each dimension has the same weight.

• Parents education seems to be the most important factor in explaining unequal distribution of children’s opportunities

HOI - LACHOI Education HOI Housing

conditionsHOI

Argentina 89 88 88Bolivia 83 41 62Brazil 67 77 72Chile 90 93 91Colombia 78 69 74CostaRica 79 94 86DominicaRepublic 77 65 71Ecuador 80 69 74El Salvador 65 46 55Guatemala 51 50 50Honduras 62 44 53Jamaica 90 55 73Mexico 88 75 82Nicaragua 59 34 46Panama 81 57 69Paraguay 74 59 67Peru 83 49 66Uruguay 85 85 85Venezuela 84 89 86Average 76 64 70

Inequality in labor markets (Abras et al.) Contribution of circumstances (Jobs with 20 hrs+ and tenure)

Cro

ati

a

Slo

venia

Kaza

khst

an

Kyr

gyz

stan

Latv

ia

Lit

huania

Russ

ia

0

2

4

6

8

10

12

14

16

18

20

Circumstances Age Education

Dis

sim

ilari

ty I

ndex (

%)

Inequality in labor markets (Abras et al.) Relative Contribution to Inequality of circumstances

(Jobs with 20 hrs+ and tenure)

Croatia

Slovenia

Kazakhstan

Kyrgyzstan

Latvia

Lithuania

Russia

0% 20% 40% 60% 80% 100%

Gender Father's education Parents at communist party Self-reported minority

Labor deprivation and gender in Morocco (Serajuddin and Verme)

 RLD (All) RLD (Youth)

When the reference group is universalSociety 0.279 0.269

Decomposed by gender Female 0.202 0.179Male 0.077 0.090

When the reference group is gender specificSociety 0.240 0.221

Male 0.292 0.291Female 0.137 0.118

Health subsidies (Wagstaff, A.)

0%

10%

20%

30%

40%

50%

60%

Den

mar

k

UK

Ker

ala

Indo

nesi

a

Vie

tnam

Gha

na

Peru

Gui

nea

Bih

ar

% o

f to

tal s

ubsi

dy a

ccru

ing

Poorest 20%Richest 20%

Equity in Health Finance (Wagstaff, A.)

Japan

Taiw

anKorea

Kyrgyz

Rep.

ChinaIndia

Nepal

Sri La

nka

Philippines

Hong Kong

Indonesia

Thail

and

Bangla

desh-0.10

-0.05

0.00

0.05

0.10

0.15

0.20

0.25

Progressivity – total payments

Perceptions of inequality (Verme, P.) Pro-inequality score in Egypt

5

5.5

6

6.5

7

7.5

8

8.5

9

9.5

10

1 2 3 4 5 6 7 8 9 10

Mea

n Pr

o-in

equa

lity

2000

2008

Perceptions of inequality (Verme, P.)Change in pro-inequality score (2000-2008)

-3

-2.5

-2

-1.5

-1

-0.5

0

0.5

1

1.5

mor

occo iran

egyp

t

mol

dova

chin

a

viet

nam

jord

an

peru

sout

h ko

rea

indo

nesi

a

cana

da

japa

n

arge

ntina

unite

d st

ates

spai

n

indi

a

turk

ey

chile

mex

ico

Inequality of Opportunity for Children in Egypt (Velez et al.)

Access Equality of Opportunity

Complete primary education on time 51 56 0.6 88.0 12.0Complete secondary education on time 55 60 0.6 81.0 19.0Complete post-secondary education on time 7 11 0.5 82.0 18.0School attendance, 9-15 0 89 0.0 0.0 0.0Water 77 88 1.3 67.0 33.0Sanitation 26 30 0.5 64.0 36.0Lighting energy source 98 99 0.1 0.0 0.0Cooking energy source 73 98 2.8 64.0 36.0Non-overcrowding, 0-5 48 59 1.2 62.0 38.0Telephone 14 71 6.3 78.0 22.0Assisted birth delivery 64 84 2.5 74.0 26.0Post-natal care, 0-5 19 28 1.1 91.0 9.0Prenatal care, 0-4 58 78 2.6 76.0 24.0Immunization vaccines, 0-4 87 85 -0.2 12.0 88.0Non-wasting, 0-4 88 75 -1.6 79.0 21.0Non-stunting, 2-17 69 69 0.0 0.0 0.0Non-underweight, 0-17 80 85 0.6 60.0 40.0Aggregate HOIa16 57 67 1.2 0.0 0.0

Opportunity 2000 Circa 2009 Annual rate of change

Decomposition *

Equity Measurement for ChildrenSome Challenges

• The Inequality of opportunity work is generally based on HBSs

• HBSs cover 95-98% of the population but typically exclude the extremely rich and the extremely poor

• HBSs very rarely measure intra-household distribution of resources

• HBSs very rarely question children, only adults• Head of households may not report accurately

information on children work, education, disabilities and mental status and do not usually report domestic violence

• HBSs do not cover street/homeless/parentless children• Standard HBSs are not sufficient instruments to assess

children opportunities

Secular and Recent Facts about Inequality

• Poverty decline Vs. inequality increases - secular trends

• The poor are joining the middle-class but the rich have left everyone else behind

• Then, the 2007-2008 global financial crisis, evidence on top 1% of incomes, banks’ premiums, wall street protests, Arab spring, bankrupt governments,…

World Poverty 1981-2008

1981 1984 1987 1990 1993 1996 1999 2002 2005 200820

25

30

35

40

45

50

55

60

65

70

Headcount index of poverty (% below poverty line)

$2 per day

$2 per day (less China)

$1.25 per day

$ 1.25 per day (less China)

World Inequality (Milanovic, B.)

Some final questions

• Is income inequality back from the cold?

• Is there an optimal level of income inequality?

• Is there an equitable level of income inequality?

• Should these questions be asked?