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The World Bank’s Inequality Omissions

Research & Commentary
October 03, 2016

by Peter Bakvis

The development finance institution aims to track global progress towards reducing inequality, but its first annual analysis comes flawed. 

The World Bank’s new report on inequality contains several inexplicable omissions.

Poverty and Shared Prosperity is the first in a series of annual reports tracking progress towards two key “Sustainable Development Goals,” or SDGs, developed through a global process spearheaded by the United Nations. These goals set out specific targets in 17 areas, from climate change to democratic governance, that nations will attempt to achieve by 2030.

The new annual World Bank report will evaluate progress towards the goals of reducing extreme poverty to 3 percent of the global population and sustaining the income growth of the bottom 40 percent of the population at a rate higher than the national average.wb-report-full

The first edition of this new publication focuses on inequality because with global economic growth slowing, the World Bank notes, reducing inequality will be central: “Achieving the same poverty reduction during a slowdown in growth … requires a more equal income distribution.”

Poverty and Shared Prosperity offers some useful analyses of inequality and the forces driving it. But the report offers no analysis of the partial and modest reversal of growing inequality trends in the most recent five-year period examined. The report also does not analyze or propose measures to reduce wealth inequality, a much more extreme phenomenon than income inequality.

In addition, the World Bank report’s almost 200 pages put forward a remarkably incomplete set of policy recommendations. The report, for instance, fails to put forward any recommendations for addressing the labor market drivers of inequality. even though some of its own analysis identifies the crucial role that increasing minimum wages and formalizing employment can play for achieving more equal income distribution.

At the instigation of the World Bank, the UN’s Sustainable Development Goal on inequality adopted the “boosting the bottom 40 percent” target over a more precise and widely accepted indicator of income inequality such as the Gini coefficient. Much of the Bank’s report focuses on what it calls the “shared prosperity premium,” the difference between income growth for the bottom 40 percent and average income growth in in each country.

[pullquote]The report fails to address labor market causes of inequality even though wage increases and formalizing employment play a crucial role in income distribution.[/pullquote]

The World Bank’s report optimistically declares that two-thirds of the countries analyzed showed a shared prosperity premium in 2008-2013. But the World Bank makes this declaration on the basis of data for only 83 countries out of a potential 195.

The World Bank’s limited sample includes only two countries in the Middle East-North Africa out of 18 possible and omits the region’s highest-population country, Egypt. The Sub-Saharan Africa group omits large and highly unequal countries such as Nigeria and South Africa. Even the industrialized country group excludes some large countries such as Japan, South Korea, and Canada.

The data also only cover the years 2008 to 2013, hardly a typical five-year period. These years coincided with the aftermath of the 2008-2009 global financial crisis, a period characterized by an asset-price collapses in many countries.

The World Bank does concede that because of the small value of the shared prosperity premium, “the goal of [almost] ending poverty by 2030 cannot be reached at current levels of economic growth” and that “reduction of inequality will be key to reaching the poverty goal.” At this point in its analysis, the Bank abandons the “bottom 40” criterion, presumably because of its imprecise nature, and reverts to discussing developments in the Gini index.

As many other analyses of global inequality have noted, the global Gini index has declined since the 1990s because of rapidly rising incomes in some very populous countries, most notably China and India, even though within-country inequality has increased. But the World Bank again finds room for optimism because in the most recent five years it examines, 2008-2013, Gini coefficients fell in five of the seven world regions.

The World Bank report marvels that the “progress is all the more significant given that it has taken place in a period marked by the global financial crisis of 2008-09” but fails to analyze the impact of the crisis on distribution of income. The World Bank does not explore whether this period has sustainably reversed a quarter century of increased within-country inequality or whether the specific impacts of the financial crisis and subsequent recession may have only temporarily halted the growth of inequality.

[pullquote]The ‘progress’ identified by the Bank in 2008-2013 may in fact only mirror what took place during the previous global economic crisis.[/pullquote]

The “progress” identified by the Bank in 2008-2013 may in fact only mirror what took place during the most severe previous global economic crisis, the Great Depression. Estimates of the Gini index in the United States during the 1930s show a sharp reduction in income inequality. That reduction can be explained by a combination of Donald Trump-style business losses experienced by some wealthy individuals at the beginning of the 1930s and the introduction of progressive New Deal programs later on. Few today would celebrate the Great Depression as a period of significant progress in human welfare.

The World Bank’s new report adds, on the basis of information avalable from only a small number of countries, that the income share of the top 1 percent of income earners has increased in recent years, contradicting the claimed equality trend.

As to worst performer in terms of increased inequality, the World Bank confers that designation on Greece, where household income of the bottom 40 percent shrunk by 10 percent per year in 2008-2013. Let’s remember that the Greek economy entered into recession, along with many other European countries, in 2008-2009, but plummeted into a full-blown depression in 2010 after the imposition of severe austerity and labor market deregulation conditions attached to a bailout by the European Union and International Monetary Fund.

The new World bank Poverty and Shared Prosperity report devotes a chapter to five countries it calls “among the best performers” for narrowing income inequality and “showing good shared prosperity premiums.” By far the largest of these is Brazil (the others are Cambodia, Mali, Peru, and Tanzania). Not for the first time in a World Bank analysis of Brazil, the report attributes 80 percent of the decline in inequality in 2003-2013 to what it calls “labor market dynamics” and the expansion of social programs. Among the former it identifies “increasing wage premiums for the less skilled, more formal jobs and a rising minimum wage.”

Brazil’s policy of regular minimum wage increases and formalization of unprotected workers also included access to pensions and other benefits and strengthened collective bargaining rights. The World Bank’s report correctly identifies policies that improved the situation of low-wage workers as having been key to the substantial decrease in income inequality — Brazil’s Gini index fell from 63 in 1989 to 51 in 2014.

[pullquote]Greece, which plummeted into depression after imposition of harsh EU-IMF loan conditions, is identified as the worst performer.[/pullquote]

Poverty and Shared Prosperity does not speculate on the likely reversal of this progress if the current, unelected government in Brazil succeeds in its announced intention of ending regular increases in the minimum wage and capping social spending.

Inexplicably, given the role that expansion of workers’ rights and improved minimum standards played in decreasing income inequality in the most substantial of the report’s five success stories, the new World Bank report omits labor market issues in its recommendations chapter. That section focuses instead on six “high-impact strategies” identified by Bank researchers: early childhood development, universal health coverage, universal access to quality education, cash transfers to the poor, rural infrastructure, and progressive taxation.

I have no qualms with any of these. But we should note that the Bank tends to have a loose definition of universal health care — making low-cost or free primary services available to the poor seems to meet the definition — and the conditional cash transfer schemes favored by the Bank often do not reach all of the most vulnerable or are developed at the expense of eliminating more broadly available programs such as cheap basic foodstuffs.

Precarious work, the undermining of worker legal protections, and the weakening of collective bargaining have been identified as major causes of increased inequality even by IMF researchers, despite the Fund’s lack of interest in promoting worker rights in its country programs. (See for example the following papers issued by the IMF: “Inequality and Labor Market Institutions”  and “Causes and Consequences of Income Inequality: A Global Perspective.”)

So it’s surprising that the World Bank did not follow up on its own analysis — and that of many other researchers — and include measures to improve minimum wages and strengthen labor market institutions in its recommendations for reducing inequality.

Peter Bakvis directs the Washington, D.C., office of the International Trade Union Confederation, which represents 180 million workers in 162 countries.

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