Development Roast Giving international development a proper roasting
It is difficult to imagine a country more unequal than Bolivia. Some people live in simple one-room dwellings without electricity, piped water, bathroom, or any other basic conveniences, and only get to spend a dollar on special days. Other people live in big mansions with home cinema, swimming pool, fitness room, and plenty of servants.
You don’t need to calculate Gini coefficients to see that Bolivia is clearly more unequal than Denmark. But to assess more subtle differences, it is necessary to rely on more than casual observation.
United States also have extremely poor people living under bridges and extremely rich people living in spectacular mansions. It is difficult to immediately judge whether the US is more or less equal than Bolivia. According to the standard Gini coefficients measuring inequality of income, Bolivia is considerably more unequal than the US: Bolivia has a Gini coefficient around 0.60, whereas the US has one around 0.47 (1).
But this is to a large extent because few Bolivians receive regular salaries (at most 1/3 of the economically active population), and thus have to make a living in ways that often do not register as income, but which put food on the table nonetheless. By far the main part of the economically active population in Bolivia are subsistence farmers or informally self-employed, who generate hardly any profit (income), but which may generate sufficient goods for auto-consumption.
The Gini coefficient measured on consumption is about 0.44 for Bolivia (2). That is, about 16 points less than the Gini coefficient based on income. This is a substantial, but entirely understandable difference, which is mainly due to informal self-employment.
A consumption based Gini coefficient is not available for United States (3), but there is reason to believe that it is not much different from the income based Gini coefficient, as the informal sector is limited. For the few rich countries where both consumption and income Gini’s have been calculated simultaneously, they tend to be quite similar (see Table 1). If anything, the consumption based Gini coefficient appears to be higher than the income based Gini coefficient.
| Table 1: Consumption and Income based Gini coefficients in rich countries | |||||||||||||||
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| Source: UNU-WIDER Inequality Data Base |
Thus, if we use consumption based Gini coefficients, which much better reflect real differences in standards of living, it seems that Bolivia is probably less unequal than the United States.
There is really no excuse for using income based inequality measures for poor and middle income countries. They are highly biased for all countries with a substantial informal sector, which means that all cross country studies using income based Gini coefficients are highly dubious. And that would include my own.
Have a comment or would like to add to the discussion? Leave a reply below.
(*) Director, Institute for Advanced Development Studies, La Paz, Bolivia. The author happily receives comments at the following e-mail: landersen@inesad.edu.bo.
(1) See the UNU-WIDER Inequality Data Base: http://62.237.131.23/wiid/wiid.htm .
(2) As estimated by the author from the 2005, 2002, and 2001 MECOVI surveys.
(3) In the World’s largest inequality data base, the UNU-WIDER Inequality Data Base, all of the 120 Gini coefficients for the US are based on income and none on consumption or expenditure.
…There can be no doubt that the wealth gap in the United States has insecared dramatically over recent years. It is my opinion that the gap is already unsustainable. Unfortunately, the gap is increasing and shows little sign of narrowing.As many know, I believe the insecared wealth gap is the result of fundamental shifts in America’s economic landscape. These shifts include, but are not limited to, technological advances that obviate the need for labor and the ease of shipping American jobs to low cost overseas labor markets.While taxing the rich would succeed in taking away money from the top of the economic ladder it will not provide meaningful work for those lower on the ladder. Rather, it will further empower a corrupt and incompetent government by providing yet more money to be squandered by lifelong politicos and bureaucrats. In other words, the wealth gap will be lessened by making everybody poorer.Arguably, money could be taken from the top and simply redistributed to those lower on the ladder. Almost 50% of American households pay no income tax already so this is already a work in progress. My Dad used to say that idle hands are the devil’s playthings. I think he was right. What kind of society will exist if a relatively small percent works and generates the wealth while a relatively large percent lives on government hand outs? Not a very good society, I’d say.So, what options do we have between wholesale wealth redistribution and a society of a few “haves” with many “have nots”? I believe there are a number of options:1. Aggressively enforce our immigration laws. Illegal immigration of uneducated people increases the supply of those with limited work skills thereby depressing the wages of those at the bottom of the economic ladder. Illegal immigration keeps the poor poor.2. Encourage collective bargaining. It is imperative that people willing to put in an honest day’s work receive an honest day’s wage. Creating a societal rung of working poor makes the wealth gap worse and discourages people from seeking employment. Discouraged people make for poor citizens and poor parents.3. Tax businesses who export jobs to low cost countries. Many of the countries where our jobs are being shipped use various techniques to create uneven playing fields. The Chinese use currency manipulation for example. America’s corrupt political elite is one of the only entities in the world willing to sell out its own people in order to curry favor with well heeled special interests. This must end.4. Reinvent education. I list this last because it is the least important. Our educational system is broken, there is no doubt. However, even even if the system could be fixed tomorrow the impact of that fix would not be felt for years. Additionally, excessive focus on the education system provides a relatively painless alternative to taking the short term actions required to address the wealth gap. Too many use education as a crutch to avoid other, more difficult decisions.As I’ve written before – I am open to alternate, practical and timely alternatives to addressing the wealth gap in the United States. So far, I have heard none.4/21/11 12:25 PM