Why economic inequality matters for development

Does economic inequality matter for development? That’s a question we discussed at a recent event with international experts and practitioners. Among them was our Chief Economist Indermit Gill, who responded: “How can it not? If you look at the aspects of inequality—you can talk about the inequality of opportunity, of income, of wealth, and of power—it matters a lot. It can really hurt development, if it’s too high or unmanageable. But then, the real question is, what do you do about it? And is the cure often worse than the disease?”

High economic inequality in a country can limit people’s ability to move up the socioeconomic ladder, and thereby slow progress toward broad-based growth and poverty eradication. Decreasing high levels of inequality, on the other hand, can spur economic development, strengthen human capital, and speed up poverty reduction.

We know that tackling economic inequality is essential for boosting shared prosperity and achieving key development goals. But when does inequality become too high? What policy solutions are most effective? 

How the World Bank monitors economic inequality 

To effectively address inequality, we first need to measure it accurately. The World Bank’s Poverty and Inequality Platform provides Gini index estimates—a measure of how equally (or unequally) income or consumption is distributed among a population—for 172 countries, covering about 98 percent of the world’s population. This valuable tool helps assess the level of economic inequality in these countries. One reason we chose the Gini index is because of its long history of use and familiarity to a broader audience. 

The data from this platform underpins a new global indicator we introduced in 2024 as part of the World Bank’s Corporate Scorecard: The number of countries with high inequality, defined as those with a Gini index above 40. The latest data shows that over one in four people live in countries with high inequality, primarily concentrated in Sub-Saharan Africa and in Latin America and the Caribbean.

Challenges with monitoring economic inequality

Our indicator, while useful, is just one of many ways to measure economic inequality—and each method has its limitations. In the case of the Poverty and Inequality Platform, for instance, estimates rely on household survey data, which often underrepresent people at the extreme ends of the income distribution due to underreporting or nonresponse.  

Data frequency also varies; some countries update their estimates annually, while others do so less often. What’s more, countries in Latin America and many high-income countries tend to use data on disposable income, while others—mostly low- and lower-middle-income countries—rely on consumption expenditure, largely because that’s the data available. 

Other factors can also make it difficult to accurately compare inequality estimates across countries. Some countries adjust for price differences between rural and urban areas when calculating real household income or consumption; others do not. Comparability issues can also arise over time, as countries change their survey designs and methodologies. 

In recent years, there have been efforts to address these gaps, such as by combining household surveys with tax records or other administrative data. But outside of high-income countries, data on comprehensive personal income taxes is often limited. 

Investing in better data to strengthen policy making 

More accurate and timely data will help improve how we measure and monitor economic inequality, which is crucial for developing better policies. 

The World Bank actively works with countries to improve the quality of their welfare data. This includes building stronger partnerships with national statistical systems, expanding the use of tax and administrative data to bridge data gaps, and developing innovative methods to better capture income and wealth distributions. 

For example, as part of the 21st replenishment of the International Development Association (IDA21), our fund for low-income countries, we are committed to helping 30 IDA countries invest in household surveys, empowering them to design better, evidence-based policies. 

The World Bank’s mission to end poverty and boost shared prosperity on a livable planet envisions a world where growth is not only robust but also broad-based. That means systematically including people across all income levels, especially those at the bottom of the distribution. 

To achieve these goals, we need to understand the drivers of economic inequality. That requires better data, stronger partnerships, and open dialogue. While challenges remain, our commitment to evidence-based policy making and collaboration will continue to guide our efforts to ensure that growth benefits all and that no one is left behind.