Shaik

An International Comparison of the Incomes of the Vast Majority

Anwar Shaikh Amr Ragab

August 20, 2008

Department of Economics, Room 1124 Graduate Faculty New School for Social Research 79 Fifth Avenue, New York, NY 10003

shaikh@newschool.edu ragaa932@newschool.edu 212 229-5717 x 3051 (office) 212 229-5724 (fax)

An International Comparison of the Incomes of the Vast MajorityAbstract This paper expands the standard list of international economic measures to include the per capita income of the vast majority (VMI) of each nation's population. The VMI is an intuitive combination of information on national income with information on its distribution. It gives rise to new international rankings of countries; to a surprising and powerful empirical relation between VMI andAmartya Sen's "inequality-discounted GDP per capita"; and to a new interpretation of the Gini coefficient as the percentage difference between the per capita income of the first seventy percent of the population in the income distribution and the overall national average.

Keywords income distribution, inequality, economic indicators, world, international

Acknowledgements We wish to thank theBernard and Irene Schwartz Center for Economic Policy Analysis for research support.

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An International Comparison of the Incomes of the Vast Majority

Introduction

National and international income and its distribution are generally treated separately, with GDP per capita (GDPpc) as the paramount measure of national income and the Gini coefficient (G) as the central measure ofinequality. The implicit understanding is that the greater the Gini coefficient, the less representative is the level of per capita national income.

One simple alternative to the traditional separation between income levels and income inequality is to combine them into an intuitively useful statistic such as the per capita income of the first 80 percent in the income ranking. This measure, the VastMajority Income (VMI), has obvious political significance in any modern democracy. We calculate the VMI for countries in the World Income Inequality Database (WIID2a) of the United Nations University (UNU) and the World Institute for Development Economics Research (WIDER). The ratio of vast majority income to average per capita income (VMIR) varies considerably across nations, and we find that thetwo measures give rise to different international rankings.

The VMIR and (1-G) are both measures of income equality, and both can be derived from the Lorenz curve. We find that the two are linked together by two very robust rules that hold across all countries and through time in each country in our large data sample. The "1.1 Rule" implies that the per capita income of the first 80 percent ofthe population in any income distribution is always equal to 1.1 times inequality-discounted net national income per capita, where the latter term refers to the product of (1-G) and per capita net national income (NNIpc). The"1.0 Rule" tells us that per capita income of the first 70 percent of the population is equal to inequality-discounted NNIpc, i.e. that the relevant coefficient is 1.0. Thisimmediately translates into a new interpretation of the Gini coefficient: (1-G) represents the per capita income of the first 70 percent of the population relative to NNIpc; equivalently, G represents the percentage difference between NNIpc and the per capita income of the first 70 percent of the income distribution. These empirical rules cast a new light on Sen's (1976, pp. 30-36) argument that(1-G) should be used as a discount factor for GDPpc in order to

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An International Comparison of the Incomes of the Vast Majority
account for varying degrees of income inequality, and on the UNDP's subsequent use of such a procedure (Hicks, 2004, pp. 2-3;1997).

We investigate whether our two universal empirical rules might be statistical artifacts of data-fitting procedures, and conclude...