Measuring development with inequality: How (should) aggregate indicators of development account for inequality?

The paper analyzes how inequality is accounted for in aggregate indicators of development and whether and how it should be used. The motivation behind the study stems from the renewed interest in inequality in academia, public discourse, and in global policy. First, we argue that inequality should be considered when constructing development indicators. The role of distribution in development is important both because people generally prefer lower inequality and inequality tends to have negative effects on development outcomes. Second, we analyze how ten selected development indicators account for inequality (in terms of justification, type of inequality, measure of inequality, and method of incorporation) and what the strengths and weaknesses of different approaches are. We found considerable diversity especially for inequality measures and methods of incorporation. As for the type of inequality, inequality of opportunities is considered marginally and overlapping inequalities not at all; increasing data availability opens the door for inclusion especially for the latter aspect. As most indicators suffer from insufficient methodological substantiation, we argue for increased clarity regarding why and how inequality is accounted for in development indicators. The analysis is complemented by a detailed review of treatment of inequality by the analyzed indicators (Annex).