What is inequality?
Inequality is most broadly referred to as the distribution of income or wealth among people in a given place, whether it is a country, region, continent or the entire globe.

But the meaning of inequality and, correspondingly, how to measure it, is a topic of much debate.

One way to measure inequality is to look at the extremes of incomes between the richest percentages of a population versus to the poorest – usually the top and bottom 10% and 20% are compared.

The ‘Gini coefficient’ is the widest used formula to measure the overall income inequality of a population. A Gini coefficient is given by relating the range of incomes in a country to its population. It expresses inequality in terms of the percentage of a population that deviates from the average income. The Gini coefficient is usually expressed as a number between 0 (‘perfect’ income equality) and 1 (‘perfect’ inequality), however it is also expressed as a percentage, 0% being perfect equality, 100% being perfect inequality.

Inequality can be examined in, mainly, three ways:

• Within-country inequality: inequality of people within one country
• Cross-country inequality: inequality of GDP per capita between countries – countries are considered unequal if the average income in country A is higher than the average income of people in country B
• Global or world inequality: inequality of incomes of everyone on the planet irrespective of their country – this is a globalised viewpoint in which the richest 10% of people may come from the USA, Japan, Brazil, and the poorest from Venezuela, Namibia and East Timor.
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However, measures of inequality based on income necessarily reduces the issue of underdevelopment to one dimension. Other efforts to expand inequality to include the distribution of human and social capital, are for example, the UN’s Human Development Index (discussed further below).

Contested concepts of inequality
One of the most hotly contested aspects of inequality research is whether it is increasing or decreasing. But the problem starts with deciding which way to measure it.

Some inequality experts say that a definitive answer will never be found because each answer relies on choices with regard to definition, sources of data, and methods by which inequality is measured.

Firstly, each concept of inequality is fit for different purposes. Within-country inequality is useful in assessing which policies might reduce poverty for a particular population; cross-country inequality is useful in indicating whether developing countries are adopting policies that enable their incomes to catch up with others; and global inequality is useful in measuring the overall welfare of the planet. It is also the case that different measures are used to make political points by governments, NGOs or multilateral institutions.

Secondly, the answer will be affected by the quality of the data being collected, and, particularly, the unit of measurement. It is easy to compare incomes in one country, but how can incomes be compared across countries that use different currencies? Inequality figures have in recent years been adjusted following a move away from calculating currencies according to exchange rates, and towards using Purchasing Power Parity (PPP). PPP – used in the UN Human Development Index – more accurately reflects the real spending power of people across the globe.

Is inequality getting better or worse?
The issue of whether inequality is generally increasing or decreasing is hotly debated, although a tacit consensus may be emerging.

Within-country inequality
A number of studies have found that inequality within countries around the world is rising.

Against the view that economic liberalisation is not connected with greater inequality, a 2001 study by Cornia and Kiiski found that inequality has risen over the past 20 years in 48 out of 73 countries for which high-quality data could be obtained. Among the remaining countries, only 9 experienced declining inequality.

Lundberg and Squire (1999) found that greater economic liberalisation has been accompanied by greater inequality, since the benefits of economic openness have primarily accrued to the richer classes.

More recently, a 2007 volume edited by Boudot and Sundaram found that both within-country and cross-country inequality are rising.

Cross-country inequality
A study by Branko Milanovic, comparing trends in the Gini coefficient found that between 1988 and 1993, cross-country inequality rose from .55 to .58. Similar findings are also made by Angus Maddison and Marc Lee.

Challenges to these findings include a report by Dollar and Kraay who compare countries on the basis of their ratio of trade volume to GDP, and openness to trade. They argue that poverty and inequality has been reduced by countries with more open trade policies; ‘globalisers’ have overtaken ‘non-globalisers’ in growth and poverty reduction. However, this includes an implicit admission that inequality has increased between ‘globalisers’ and ‘non-globalisers’. Dani Rodrik notes that the countries included by Dollar and Kraay are highly selective and contradictory because ‘globalisers’ such as India and China have highly protected economies while ‘non-globalisers’, mainly countries in sub-Saharan Africa and Latin America have high degrees of trade openness after years of IMF and World Bank interventions.

Martin Wolf and Sala-i-Martin make similar arguments to Dollar and Kraay – that cross-country inequality does not matter, and indeed, is decreasing. However, a later study by Milanovic noted that their findings were swayed by high GDP growth rates in China and India. However, omitting those countries showed increasing cross-country inequality across the globe.

Global inequality
A 2006 study by Bourguignon & Morrison, looking at the global inequality trend from the 1820s, found that inequality increased until the late 20th century but has since levelled off. However, Branko Milanovic counters that household income inequality – a better measure of the distribution wealth and equality of opportunity – increased quite rapidly between 1988 and 1993.

According to Bob Sutcliffe, global inequality (measured by the Gini coefficient) is about the same as two notoriously unequal countries: South Africa and Brazil – around 0.65.

Does inequality matter for development?
For decades, inequality was not considered an important part of tackling poverty. Economists such as Anne Krueger (former IMF director) and Martin Feldstein say that inequality does not matter so long as everyone’s incomes are rising – ‘a rising tide lifts all boats’. Simon Kuznets argued that inequality ‘naturally’ increases with economic development and is acceptable so long as it is only a temporary situation – lower inequality is generally associated with richer countries, but some must go through a transition period before they reach higher incomes.

These views imply that there is a necessary trade-off between growth and social equity: that achieving equality reduces overall economic growth. But others counter that inequality itself undermines growth and poverty reduction. This view is now echoed by the World Bank which makes the point in its 2006 World Development Report that ‘pro-poor growth’ - defined as economic growth which does not create greater inequality – cannot be achieved without policies to redress social inequity.

However, the impact of inequality goes beyond economic concerns. A report by the WIDER institute found that inequality has negative political and social side-effects such as political instability and higher crime. Global inequality is accompanied by rising international crime such as human trafficking and terrorism. Inequality, therefore, gives rise to increased policing costs, which, according to Bob Sutcliffe could be minimised if greater equality were to be achieved.

Milanovic also argues that poverty and inequality are inseparable – since inequality is both a matter of material wealth and a reflection of how a society values a person, inequality is essentially a matter of social justice. Rises in crime and political instability are not expressions of ‘envy’ as much as they are often driven by a sense of injustice in society. As such, aid effectiveness and poverty reduction policies depend on addressing social injustice as well as ensuring that aid is spent on providing for basic needs such as those outlined in the Millennium Development Goals.

The UN Human Development Index (HDI) is one attempt to measure global human well-being across the globe in a more holistic manner. It factors together income (measured as Purchasing Power Parity), life expectancy at birth and educational attainment, as indicators of the distribution of economic and human capital in a country. It then produces a ranking system by which countries’ development can be compared. However, the HDI does not factor in inequality. Moreover, criticisms have also been made about the HDI’s methodology, which some argue is predisposed towards showing a convergence in global well-being, which may misrepresent what may be happening, or at least present an over-simplified picture of global development.