← The CGD Podcast
The CGD Podcast
Median Income as a Better Measure of Development Progress—Nancy Birdsall and Christian Meyer
00:26:26
Development progress has traditionally been measured in terms of reductions in poverty and increases in per capita GDP, that is, average income as calculated by dividing total income by the total population. My guests on this week’s...
Loading summary
Transcript62 lines
- [00:17]
A
Welcome to the Global Prosperity wonkast. I'm Lawrence MacDonald. My guests today are Nancy Birdsel and Christian Meyer. They are the authors together of the Median Is the Message a good enough measure of material well being and shared development progress? Nancy and Christian, welcome to the show.
- [00:33]
B
Thank you very much, Lawrence.
- [00:34]
C
Thank you.
- [00:36]
A
Nancy, what got you thinking about the median? The development progress has been measured for a long time in terms of average GDP per capita, or gni, in terms of reductions in the absolute poverty rate. And you're coming forward with something that on the face of it is pretty straightforward and simple, but I gather has not been discussed much before. What prompted you to start thinking about the median?
- [00:59]
B
A couple of things. One is that as some listeners know, I've been thinking about and talking about and writing about the middle class in developing countries for some years. And a long time ago, almost 10 years ago, I did a paper where I defined, with a co author, the middle class as the group around the median. And that's when I discovered how low the median is because that definition of the middle class depends on it didn't make any sense. And in fact, in the end we called it kind of the middle income group because it was not middle class by Western standards.
- [01:34]
A
And I think in subsequent work on Latin America, you said if you want to be middle class in any kind of sense that we might understand, you need at least $10 per day per capita. Exactly the point where you're no longer worried about where the next meal's coming from.
- [01:46]
B
Right. And since that's about three times the median at the moment for all developing countries, $10 per capita per day. So that was one thing. The second thing is all the discussion of extreme poverty and the critique of Lant Pritchett on our website about the fact that when you go from $1.14 a day to $1.26 a day, what does that really mean? So that got us thinking, Christian and I a little bit also about the World bank and USAID definitions of poverty and how that's related to to the reality that so many people at the median are actually poor. And I think a third thing, again working with Christian on this struggler group in Latin America, a different paper that also took me back to the reality that though there are millions and millions of people who've escaped extreme poverty and we can all celebrate that, to be at $3 a day, which is where half of developing country population are, is indeed still to be poor by any reasonable definition.
- [02:51]
A
Christian, for those who don't live and breathe statistics Remind our listeners what the median is.
- [02:58]
C
Well, the median is basically a simple statistic, I think, to figure out a typical value of a distribution. If you line up 10 incomes from lowest to highest, the median would be the middle number. And in that way, the way that most income distributions are like with a few people that have very high incomes and many people that have not so high incomes, the median is a better measure of the typical income of a distribution.
- [03:25]
A
The person with the median income, half the people have more money than she does and half the people have less. And that's distinct from what economists and statisticians call the mean, but it's often called the average, which is you've got 100 people, you add up all their money, you divide by 100, and then you get the mean, or what we typically call the average.
- [03:44]
C
Exactly.
- [03:45]
A
And why is it, Nancy, that in development economics until now there's been a lot of attention to the mean, to the average income instead of the median?
- [03:57]
B
Because that's where the light was shining. We had national accounts data that started to be developed five, six decades ago and was collected not perfectly in every country, but everybody could look in the World Development Report or the World Development Indicators of the World bank or the IMF statistics and look up both the population of a country and that country's total gdp. By dividing total by the population, you get an average. What's changed in the last 10, 20 years is the availability of household survey data where you're actually asking people more directly, what are you consuming every day? What is your daily income? And so now we have increasing access to the entire distribution of consumption or income across households, so it becomes possible.
- [04:55]
A
To gather and compare median data.
- [04:58]
B
Exactly. It's just easier now.
- [05:00]
A
And another thing, before we began the broadcast that you were showing me in figure, I think it was figure 11 in your paper showing the divergence in the US mean or average and the median that for a while they tracked pretty closely and they weren't very far apart. And in the last two, three decades, they've diverged a lot. And so you had a lot more people talking about median income in the US because it used to be average income was kind of average, mean, median. It didn't matter too much. Now it matters a lot. Depends what you look at. Makes a big difference.
- [05:29]
B
That's right. And actually, it's another thing that got me, reminded me to make a deal about the median is that everybody who reads the paper in this country in the US knows that the median wage has barely increased in the last 10 or 15 years. And that median household income, to the extent it's risen, it's mostly because women went to work and added another adult to the total household income.
- [06:00]
A
Christian, what are you hoping this paper's going to do? You and Nancy have written this. It's very detailed, thoughtful paper with lots of evidence as to why this is a good measure. But to what end?
- [06:14]
C
Well, I think first we're trying to convince people that now that we have better data, we should actually look at the median more carefully. We could give it more attention. We should have it maybe in best case scenario even incorporated in international development indicators such as the World Bank World Development Indicators, so that people can access it, look at it, and get a better sense of how rich or poor people actually are. The other thing that I think we're trying to argue in the paper is that if we have a measure like the median in these international indicators, it's providing what we call distribution aware measure. You know, unlike the average, as you said, it is a measure that's aware of the underlying distribution of wealth, of income, of consumption in a country. And using such a distribution aware measure, we can get a simple sense of income inequality. So I think that's also an awareness issue that we're trying to push here.
- [07:16]
A
And Nancy, is this relevant to the ongoing debate about what should be included in the post 2015 development goals framework?
- [07:24]
B
I think it is. You'll remember, Lawrence, when we had an event here that Rebecca Greenspan, who's the deputy at the United Nations Development Program, gave the opening remarks and said that in all the countries that she visited where the UNDP sponsored kind of attitude surveys about what people wanted and were talking about, income inequality came up over and over again. In the end, the high Level panel report did not. It refers to the need to assess equality by gender, by region. But it kind of shies away from a specific inequality measure for some good reasons, both political, psychological and possibly statistical.
- [08:15]
A
If you were the czar for post2015, you could just include whatever you want. What would you do related to the median? How would you design that indicator?
- [08:26]
B
I would propose including median as a measure and that each country should set up its own goal or target for an increase in the median over, say between now and 2030. As Christian said, it's a distribution aware measure. So it allows countries to set up that kind of goal without facing the kind of pushback around having thinking of inequality as an outcome, inequality of income as an outcome. When I think somewhat justifiably, everybody wants to focus on equality of opportunity or inequality of opportunity. There's just a lot of political noise around inequality, which has been discovered in the discussion over what President Obama said and didn't say in the State of the Union speech.
- [09:26]
A
Before we started to record, we were unpacking the first figure in your paper and I was asking you to pull out some examples where the mean, the average, as we currently tend to think of average income, would be strikingly different from the median, where the median would tell us more about a society. Do you have a couple of comparisons there that would shed light on that?
- [09:51]
B
A good one is to consider the difference between Cameroon and China. Both of them have median daily consumption that is pretty much the same, around $3.25 a day.
- [10:09]
A
But China's way richer than Cameroon.
- [10:11]
B
That's the point. China's GN or gnp, whatever measure you want to use, is about three and a half times higher than Cameroons. Right away, you know that there's something about China to do with high levels of inequality. There must be a very substantial group of people who have a lot of income and we know in fact that they're concentrated in urban areas and a much larger group of people who are still really very poor. And of course, that's the majority of people living in rural China.
- [10:51]
A
Krishna, I'm very conscious in this discussion that you're a European, you're a German, and I tend to think of inequality as being much more of a US problem and Europe having lower levels of inequality. Did your experiences, you know, looking at this through a European lens shape your thinking about it? Can you talk to me about median income from a European perspective in any way?
- [11:15]
C
Well, I think, you know, I mean, first, it's probably not true that Europe doesn't care about inequality anymore. As I mean, as a matter of fact, in many Scandinavian countries I think that have traditionally perceived to be highly equal, you know, income inequality has risen.
- [11:32]
A
So I didn't say they didn't care. I said they did a better job than the United States. I meant to say they do a better job than the United States at addressing it.
- [11:40]
C
Right. That was possibly true. That's possibly still true. But I think countries such as the Scandinavian countries, Germany, are struggling to keep income inequality low. The other thing obviously, personally I think in this work is that maybe as, as a European, as a German sort of, you know, used to maybe different social contract, I maybe have a personally a lower acceptance rate of inequality. And that is something that I personally find interesting here in the US that in my everyday life, the acceptable level of inequality seems to be higher.
- [12:23]
A
It's a different cultural unity, sure, for.
- [12:27]
C
Many reasons, for many good and maybe bad reasons historically. But I think the social contract has, you know, come to another norm of what's acceptable as inequality.
- [12:40]
A
Thoughts on that? Nancy it's sort of, we're out on thin ice here for economists in terms of cultural norms, but I'm interested.
- [12:45]
B
Oh, not at all. I have no, there's no, I mean what's interesting is that for, for a country like Germany compared to the US the market distribution of income is probably pretty much the same. 90%, I'm guessing a little, but not a lot. 90% of the difference in the total inequality of income is associated with the fact that in Germany there's a bigger and richer safety net, more spending that compensates for differences in income and probably a different tax system that also is more progressive than in the US Redistribution.
- [13:23]
A
Is not a dirty word, whereas I think sometimes in American politics I think redistribution is seen as, you know, getting pretty close to being a commie.
- [13:31]
B
That's true. I think that redistribution is probably not what is driving in some psychological sense. What's the difference in Europe as much as the just a different tradition of a deeper and more, a deeper safety net, more counter cyclical programs built into the system so that for example, when the financial shock hit Europe, it wasn't as much a matter of a stimulus as here, which was special spending as normal programs kicked in in to cover people who became unemployed or whose income fell below a certain line.
- [14:15]
A
We're going to take a quick break. This has led us quite naturally into something I wanted to ask you about. When we start talking about transfers to address inequality, it leads me to think about Nora Lustig's Commitment to Equity Index and I'll be interested to hear your views on that. This is the Global Prosperity Wonkcast. From the center for Global development, I'm Lawrence MacDonald. My guests today are Nancy Birdsel and Christian Meyer. We will be back in a bit. Welcome back to the Global Prosperity wonkast. I'm Lawrence MacDonald. With me today in the studio is Nancy Birdsel and Christian Meyer and we're discussing the median is the message a good enough measure of material well being and shared development progress? NANCY before the break we had begun talking about the difference between the United States and Europe in terms of the willingness of society, if you will, or the effectiveness of government measures in ameliorating the inequality that results from the market. And that led me to think about the Commitment to Equity Index in which Nora Lustig has tried to measure that, starting, I think, first with Latin America and now with ambitions to go more broadly. Can you tell our listeners a little bit about that?
- [15:52]
B
Sure, I'll try. Although I hope at some point you'll hear directly from Nora Lustig on this issue. So what Nora has done is with a team of, I think, 15 or 16 different people in different countries of Latin America, they have put together the data and made it comparable across countries, which tells us for different groups of the population by income, and in particular, NORA is focused on the poor, the extent to which fiscal taxes and expenditures shift them from one group to the next, say out of poverty into what we call the struggler group, or out of the struggler group into middle class or downward. You know, there are probably, I mean, NORA can give examples, I'm sure, of people in some countries in Latin America that were just over their national poverty line before taxes and transfers, but then fell below the poverty line because they didn't benefit much from cash transfers, which are targeted to the very poor initially very poor, and they paid fairly high taxes, usually in the form of indirect taxes in Latin America.
- [17:15]
A
Another example of this, I guess, would be when there are supposedly pro poor subsidies, like for fuel that wind up getting captured by the middle class who are enjoying them in terms of cheaper gasoline for their cars. And so if that's taken into account, that would look like a pro poor measure on the surface of it, but in fact would benefit those who are already near the top of the income distribution.
- [17:35]
B
Exactly. Of course, that's not mostly the case in Latin America, with the notable important exception of Venezuela, where there are huge subsidies for gasoline. And that is no doubt making the kind of difference you just explained.
- [17:52]
A
And I should mention that NORA has recently approached us and asked if CGD would sort of bring the Commitment Equity Index under our wing and provided a bit of a platform. And I think there was a lot of enthusiasm for that there. And we haven't figured out exactly what that means, but certainly discussing it here and linking to it on our website, I think it's very much in keeping with the work that you've done, Nancy, to try and apply these analytical tools across a group of countries.
- [18:20]
B
Yeah, there's a big question whether this enormous effort, which is extraordinarily complicated, frankly, because each country has different kinds of taxes and different kinds of cash transfers and different kinds of transfers through pension programs, and are they counted as a tax or as a contribution to your future income? Extremely detailed but fundamental work, whether it can be made into an index comparable to something like our commitment to to development index. That's a challenge. So that's where we are in the discussion. I hope so. I think it would be tremendously effective to be able to say how countries rank in terms of their revealed effort on through taxes and expenditures.
- [19:07]
A
One wrinkle in this that I remember came up, maybe it was in the workshop we had on inequality measures. Perhaps it was an issue that you raised is if, for example, you're providing free education, but even the quite poor people opt out of that and would rather pay school fees to get into private education, inexpensive private education, then is the value of that public education what was spent on it, or is it the value that the intended beneficiaries attribute to it, which might be zero?
- [19:34]
B
Exactly. I mean, everyone really in the development community is aware of this opt out issue. When you see in India and elsewhere in South Asia as well as in Latin America that you know more than 50% of households in Latin America at least, that are middle class at $10 a day or more. Well, even more than 50%. I forget our number. It's in a different paper. They send their children to private primary and secondary schools.
- [20:03]
A
I want to come back to your paper. In the break I asked if there was anything else we should cover and the answer was something about the World Bank Shared Prosperity Index. Christian, what is that and how does it relate to the paper?
- [20:15]
C
Well, I think the World bank recently announced that in addition to their primary, I think, institutional goal of reducing or eliminating global poverty, they also added a second organizational goal, which is to track the incomes of the bottom 40% in each country, in every country, presumably with a view to a sort of equitable distribution, sort of shared growth type thinking in which you want to monitor countries on how well they're doing in terms of promoting shared prosperity, promoting shared growth.
- [20:57]
A
And are you suggesting then that the median would be an alternative approach to measure the same thing in a more intuitive way?
- [21:04]
C
Well, in the paper we're arguing that one way, one advantage of the median over the World bank measure is simplicity. You know, the median income tracks the income, the measured income of the bottom 40% pretty well. As we said earlier, if we were to integrate the median into standard international development indicators and it would already be there, it would be a very easy thing to compare the median income, which is, as we said, distributionally aware, to something like the mean, the average income or average GDP per capita. And look at how the median income grows compared to.
- [21:45]
A
If I'm the World Bank, I can see where I might like tracking the income of the lower 40% better because I'm then shining zero light on the incomes of the upper 1 or 2 or 3%. And it's all seen as a problem of so called poverty reduction or poverty remelioration rather than as a wider societal problem. Nancy's smiling and nodding. You think that that's the agenda there or that's the way to dodge seeming to shine light on inequity?
- [22:14]
B
You know, I don't think it was a conscious decision. I think it probably reflected a lot of discussion, including around the reality that it's very difficult to measure incomes at the top, that people in surveys who are very rich tend to understate their income. I think the additional point to what Christian said about the median and using the mean compared to the median as a measure of shared prosperity. Well, my point would be additional, which is the following. You want some kind of comparison. If you measure growth of the bottom 40%, you're likely to get something like great 2%, 3% overall increase. But we have sort of an arithmetic issue which is that the richer you are, the more a particular rate of growth increases your absolute income.
- [23:21]
A
So my 3% raise is bigger than Christian's 3%?
- [23:25]
B
Exactly.
- [23:25]
C
Unfortunately, yes.
- [23:28]
B
And the world and people in developing countries and in the world don't think in rates. They don't think in logged normal distributions. They think in absolutes. So you know the neighbor, if you're earning $1,000 a year and your income goes up by 5%, now you're earning 1,000, what, 50 a year. But your neighbor who's earning 100,000 a year, his increase in income is huge in absolute terms. And we know from other research that that can affect relative prices in ways that actually matter for people. It can change the price of your home in your neighborhood when your neighbor suddenly has much higher income than.
- [24:15]
A
And of course it affects politics as well because money equates with voice and influence and lots of other things. So then it becomes increasingly skewed in the interests of those who are at the top.
- [24:25]
B
So what might look like success if the World bank reports growth of the income of the bottom 40% might not be so successful, in part simply because of the disequalizing arithmetic of equally shared growth.
- [24:45]
A
I think we'll leave it there. This is an odd topic in that to me it seems incredibly important because that which gets measured gets done. On the other hand, we're discussing sort of alternative measures of things. It doesn't lend itself quite as well as some other issues to sort of examples you can get your head around so quickly. But I hope that our listeners have found it useful and that if they're intrigued by this, they will take a.
- [25:12]
B
Look at it's hard to get passionate about these measures.
- [25:16]
A
I encourage those, especially those who have some training as econometricians, to take a look at the paper. We also have Nancy and Christian, a blog that I think is going to go up today by Alex Kovam, in which he argues not for the Palma, you'll be happy to know, but works through some of the politics of whether or not to include a measure of inequality in the post2015 framework in a very interesting way that I think reinforces the argument of using something like the median. So I'm sure you'll enjoy reading that as well.
- [25:46]
B
Thank you very much, Lawrence Thanks, Lawrence.
- [25:49]
A
This has been the Global Prosperity Wonk cast from the center for Global Development. My guests today are Christian Meyer and Nancy Birdsel, and we've been discussing their new paper on the Median is the Message. You can find the Wonkast online on itunes and on Stitcher. Just search for wonkcast or CGD and sign up to hear a new interview every week. Until next time, I'm Lawrence McDonald. Thanks for listening.