High economic inequality poses a significant threat to global development by slowing progress toward shared prosperity and poverty eradication. The World Bank recognises that this issue is not merely a social concern but a fundamental barrier to growth. Experts like Indermit Gill, Luis Felipe, López-Calva, Deon Filmer, and Haishan Fu from the World Bank argue that while inequality can hurt development, the key is to find effective and evidence-based solutions to manage it.
According to the experts, to tackle inequality, the first step is accurate measurement. The World Bank’s Poverty and Inequality Platform utilises the Gini index, a widely recognised tool for measuring income or consumption distribution within a population.
A Gini index of 0 represents perfect equality, while 1 (or 100%) signifies total inequality. The World Bank has introduced a new global indicator that identifies countries with a Gini index above 40 as having “high inequality,” with over one in four people globally living in such nations, primarily in Sub-Saharan Africa and Latin America.
However, monitoring inequality is not without its challenges. The data for the Gini index primarily comes from household surveys, which have limitations. They often underrepresent people at the extreme ends of the income spectrum, either due to underreporting by the very rich or nonresponse from the poor.
Additionally, data collection methods vary across countries, with some using disposable income and others using consumption expenditure, making cross-country comparisons difficult. Changes in survey design over time and the lack of comprehensive tax data in many developing countries further complicate the measurement process.
Investing in Better Data for Better Policy
The World Bank understands that to develop effective policies, it must first address these data gaps. The organisation is thus actively working to improve the quality of welfare data by:
- Building stronger partnerships with national statistical systems.
- Expanding the use of administrative data, such as tax records, to supplement household surveys.
- Developing innovative methods to better capture income and wealth distribution.
A key commitment under the 21st replenishment of the International Development Association (IDA21) is to help 30 low-income countries invest in household surveys. This effort is designed to empower these nations to create better, evidence-based policies that promote broad-based growth.
The World Bank’s mission is to end poverty and boost shared prosperity, and this requires ensuring that economic growth benefits everyone, especially the most vulnerable.
By investing in better data, fostering stronger partnerships, and encouraging open dialogue, the World Bank continues its effort to understand the drivers of economic inequality and ensure that no one is left behind.