A recent webinar held by the Technical Network on Poverty Analysis (THINK-PA) presented a paper titled "New distribution sensitive index for measuring welfare, poverty and inequality", where experts delve into innovative methods for evaluating poverty and inequality. Economists, Nishant Yonzan from the Development Data Group at the World Bank and Olivier Streck professor at Oxford University and the University of Antwerp first addressed the limitations of traditional indices such as the poverty headcount and then introduced a novel family of indices to describe poverty and economic disparities.

Although the poverty headcount and mean income are still widely used for measuring welfare, poverty and inequality, they have been contested for decades by experts in the field as they fall short in describing income inequality, including among all individuals and the poor. Despite the several indices that have been developed in economic literature to address this limitation, they are seldom utilized in academia, policy, and public discourse due to their complexity, making them challenging to convey to non-technical audiences.

Recognizing this significant gap, the authors introduced alternative indices from the economics and statistics literature that offer a more nuanced understanding of poverty and inequality. The new distribution-sensitive welfare index displayed during the THINK-PA webinar uses a simple mathematical formulation and intuitive units. The proposed basic measure corresponds to the average ratio between a given reference income level and each person's income, a new way of understanding how much each person's income needs to increase on average to match that reference level of income.

Furthermore, the welfare index becomes an inequality index when the reference level of income is equal to the average income of the distribution. The index is equal to one when income is equally distributed, and thus everyone has the same amount of income. Likewise, the basic measure, the inequality index is also interpreted as how much people's incomes need to be adjusted, on average, to match the average income.

The World Bank has already applied this novel welfare index to their last shared prosperity report – the Prosperity Gap – in which the reference level of income is set at 25 purchasing power parity (PPP) per day. Using data from the World Bank’s Poverty and Inequality Platform (PIP) to analyse global income trends, the authors found that incomes in 1999 on average at the global level, needed to be multiplied by 11 to reach the prosperity standard, while in 2023 estimates show that incomes on average need to be multiplied by five.

By breaking down the prosperity gap into subgroups, another feature of the novel measure, Nishant highlighted that approximately two-thirds of the total gap come from sub-Saharan Africa and South Asia. Their findings revealed significant shifts in prosperity standards over time, underscoring the evolving nature of economic well-being.

Overall, the presentation sparked critical conversations around redefining poverty and inequality metrics to better reflect the complexities of today's global economy. By embracing innovative approaches and indices, policymakers and researchers can gain deeper insights into economic disparities and drive more targeted interventions for shared prosperity.