A Better Measure of Shared Prosperity

February 10, 2015

One of the World Bank’s two goals for developing countries is to “share prosperity,” which it measures by the growth rate in mean consumption (or income) for the poorest 40 percent of the population. That metric has the appeal of simplicity, but it tells us nothing at all about how rising prosperity — or economic contraction — is being shared among the poorest 40 percent.

That limitation is important in the light of recent research. There’s been a lot of progress in reducing the number of people living in poverty, but much less in raising the developing world’s consumption floor — the level of living of the poorest. (I show this here.) If we are really committed to sharing prosperity then we should surely not be leaving the poorest behind. 

There is a remarkably simple fix for the World Bank’s measure of success in sharing prosperity: instead of measuring the growth rate of the mean for the poorest 40 percent, the Bank should measure the mean growth rate of the poorest 40 percent. This may sound like some nerdy quibble, but it does matter. With this change, the measure of “shared prosperity” reflects how equitably aggregate gains have been shared among the poorest 40 percent. If inequality among the poorest 40 percent falls, the mean growth rate will be higher than the growth rate of the mean; if inequality rises, it would be lower. The mean growth rate is also quite easy to calculate from any two standard household surveys.

Let’s take a simple example. Suppose that there are four representative people comprising the poorest 40 percent, with incomes (in dollars per day) of $0.75, $0.75, $1, and $1. After some economic shock or policy change, their incomes are $0.50, $0.75, $1 and $1.25 — that is, there is a gain of $0.25 for the least poor, at the expense of the poorest. The growth rate in the mean of the poorest 40 percent is zero, while their mean growth rate is –2 percent (the average of –33%, 0%, 0%, and 25%).   

In careful monitoring, a broader dashboard of measures will clearly be needed to assess how well prosperity is being shared. Since 40 percent is arbitrary it would be a good idea to check over a wide range. Other measures are available, each with advantages depending on your focus.

But if one wants a single simple measure of how much prosperity is being shared, then the mean growth rate among the poorest 40 percent beats the growth rate in their mean. That small change in wording would allow us to far more credibly track progress in sharing prosperity and at virtually no extra cost.

(In the interests of full disclosure, I participated in the internal discussions at the World Bank in 2012 about its goals. I am writing this post two years after leaving the Bank, and in the light of research since then.) 


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