Growth, inequality, and welfare: comparisons across space and time

Abstract

We propose and apply several welfare measures that combine average income with a measure of inequality to undertake cross-country comparisons of aggregate welfare for the 1970 to 2000 period. Our welfare measures, which are based on theoretical and empirical findings on the role of inequality in social welfare, drastically change the impression of levels of welfare, significantly affect the welfare ranking of countries in different benchmark years, affect changes in ranking over time, and affect convergence between industrialized and developing countries. While the results are sensitive to the type of inequality and its presumed effect on welfare, the results are robust to different ways to address comparability problems inherent in the inequality data used.