Gini Index Unchanged as Economy Grows Fast

EghtesadOnline: As the Iranian economy grew remarkably in the last fiscal year (March 2016-17), the Gini coefficient remained the same compared to that of the preceding year, according to the Statistical Center of Iran.

News ID: ۷۷۹۷۲۷

15 October 2017

Statistics indicate that the most significant shift in income seems to have occurred from the lower strata’s pockets to the middle class.

The Gini index stood still at 0.39 last year, recording no year-on-year change. This is while the economy grew by 8.3%, associated for the most part to the ramped up production and exports of oil and related products after international sanctions imposed against Iran were lifted as part of the landmark nuclear deal.

The Gini index or Gini coefficient is a statistical measure of distribution developed by the Italian statistician Corrado Gini in 1912. It is often used as a gauge of economic inequality, measuring income distribution or, less commonly, wealth distribution among a population. The coefficient ranges from 0 (or 0%) to 1 (or 100%), with 0 representing perfect equality and 1 representing perfect inequality. Values over 1 are theoretically possible due to negative income or wealth, Financial Tribune reported.

A country in which every resident has the same income would have an income Gini coefficient of 0. A country, in which one resident earned all the income, while everyone else earned nothing, would have an income Gini coefficient of 1.

Two Explanations

There can be two explanations for the static state of Gini index in Iran over the past two years.

First, the Gini coefficient could have remained the same since the new wealth brought in by the economic growth has been distributed equally among all strata of the population. Needless to say, this is the more optimistic and far-fetched scenario.

The other scenario could be that the scales have shifted, but in a way that the changes have cancelled out one another, leading to an intact index. Statistics further support this understanding.

According to SCI, the ratio of the richest 10% of the population’s share of gross national income over the poorest 10% increased from 12.65 to 12.99 last year. Moreover, the ratio of the richest 20% and 40% grew from 7.4 to 7.61, and 4.01 to 4.1 respectively.

Now, with the Gini index having stayed put, this could not have occurred unless the lower strata’s share of income had dwindled, so the only way to explain this is to consider income shifting from the lower 40% to the middle 20%.

The Gini coefficient rose incrementally from March 2012-13 until March 2016, the SCI data show. During the period, the Gini coefficient climbed from 0.37 to 0.39. Statistics also show a drop in the coefficient from 0.41 in the fiscal 2010-11 to 0.37 the year after.

The drop comes from the former government’s Subsidy Reform Plan, which at first bettered the livelihoods of lower income people, especially in rural areas. However, inflation and economic recession negated those initial gains.

The Iranian government started the plan in 2010 at a colossal cost. Every Iranian was paid an equivalent of $45 each month. The money was to replace subsidies on food and fuel that cost the government a third of Iran’s GDP each year, but ended up costing more.

Financed by printing money and windfall oil revenues, it quickly led to runaway inflation and currency devaluation.

The Gini index is criticized for being overly sensitive to what happens to people in the middle, and not so good at picking up changes at the extremes, where there has been a growing focus in inequality research.

Using the most recent figures, South Africa, Namibia and Haiti are among the most unequal countries in terms of income distribution—based on the Gini index estimates from the World Bank—while Ukraine, Slovenia and Norway rank as the most equal nations in the world, The Guardian reported this year.

The Palma ratio is an alternative to the Gini index and focuses on the differences between those in the top and bottom income brackets.

The ratio takes the richest 10% of the population’s share of gross national income and divides it by the poorest 40% of the population’s share.

This measure has become popular, as more income inequality research focuses on the growing divide between the richest and poorest in society.