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
|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.
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(*) Director, Institute for Advanced Development Studies, La Paz, Bolivia. The author happily receives comments at the following e-mail: firstname.lastname@example.org.
(1) See the UNU-WIDER Inequality Data Base: http://22.214.171.124/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.