Inequality in Mongolia
13 Aug 2015
Mongolia has recorded very high economic growth rates in the last 15 or so years. The economy has grown at an average annual rate of 8 percent since 2000 and in double-digits for three consecutive years in 2011-13. Although the growth rate has now slowed down and estimates are much lower, the result is that Mongolia is now classified as an upper middle-income country and a country with medium human development. In the same time, poverty in Mongolia continues to decline, falling from 27.4% in 2012 to 21.6% in 2014. This improvement is very positive and the pace of poverty reduction remains high compared to most other countries, however, poverty is still persistent in Mongolia and a huge development challenge.
What about inequality? The feeling, and the “word on the street”, is that the rich is getting richer and the poor poorer. What does the evidence say in this regard? This short blog post reviews some of the existing data and statistics on inequality. Why worry about inequality? Increased inequality means people are left behind in the development of a country. Inequality can be a threat to social and political stability as well as to sustained growth. Inequality is a root cause of economic stagnation.
More than 75% of the people living in developing countries are living in societies where income is more unequally distributed than it was 25 years ago. This is despite the huge gains in GDP and economic growth and despite the reductions in poverty rates.
The fact is that income inequality looking at the share of national consumption by income quintiles has not really changed much in Mongolia and is not very extreme compared to other countries.
The graph above shows that the richest 20% of Mongolia consumes 40% of the total national consumption and the poorest 20% of Mongolia consumes about 7%. In a fully equal society, the share of consumption for each quintile would be 20%. This shows that inequality measured as share of national consumption has not really changed much over time. Two conclusions can be made. It is not getting worse, but it is not getting better. The economic growth of Mongolia has not translated into changes in terms of relative shares of consumption.
Another measure of inequality is the Palma ratio which compares the richest 10% share of income to the poorest 40%. It compares the “top” versus the “base”. In Mongolia, the Palma ratio is 1.6 meaning the top 10% earns 1.6 times the bottom 40%. This is slightly higher compared to Central Asian and Eastern European countries where the ratio is around 1-1.3 but much better than Latin America which typically have rations above 3 and better than for instance Turkey and Russia which both score 1.9-2 for example.
A third measure of income inequality is the Gini coefficient. The Gini coefficient can range from 0 (complete equality) to 1 (complete inequality). For Mongolia, the latest available Gini coefficient data shows that it is 0.3652 (similar level as UK, Spain, Italy and Estonia). Also, as can be seen below, the Gini coefficient increases in Mongolia over time showing that there is an increased income inequality. A caveat here is that there is need to estimate the Gini coefficient in Mongolia using more recent data.
Gini coefficient Mongolia
The fourth measure of inequality I would like to highlight is the inequality adjusted human development index (HDI). This is measured as the HDI, which is a composite index consisting of health measured as longevity, education and income, adjusted for inequalities. When this is done, Mongolia’s ranking improves 16 places, in other words, Mongolia is more equal than its HDI peers.
The findings of this brief analysis is that Mongolian inequality measured as share of consumption or as share of income is not at extreme levels and that Mongolia compares well to its “development peers”. However, income inequality is most likely increasing. Overall, there is a need for more research and debate on inequality in Mongolia to provide more understanding and to drive national policy making. Interesting in Mongolia would be to look beyond income and consumption and analyse social inequalities such as access to quality health services and education for instance. Inequality, as well as poverty, is not a matter of fate, they can be addressed through policies and reforms.
Economic growth does not automatically reduce poverty and inequality, reducing poverty does not automatically reduce inequality. What is needed is deliberate strategies and programmes to tackle poverty and inequality. Addressing inequality is not a zero-sum game. The rich does not have to get poorer for the poor to live better lives. In other words, it is not only a matter of redistribution, the key is to ensure that the growth and wealth created benefits all of society and that it reduces inequality. Addressing inequality also means ensuring that everyone has a voice, hence it is also a matter of democracy. Finally, important to note is that the Sustainable Development Goals proposes the world to adopt a goal on reducing inequality within and among countries. More on this in coming posts.