_“One way to think about the World Bank’s new shared prosperity goal is as an alternative to average income as the benchmark of development progress. Instead of assessing and measuring economic development in terms of the overall average growth in a country, the shared prosperity goal places emphasis on the bottom 40 percent of the population. In other words, good progress is judged to occur not merely when an economy is growing, but, more specifically, when that growth is reaching the least well-off in society. Thus, the shared prosperity goal seeks to increase sensitivity to distributional issues, shifting the common understanding of development progress away from average per capita income and emphasizing that good growth should benefit the least well-off in society.”_ (World Bank (2015), p.10) As indicated in the quote above, shared prosperity is measured as the growth rate of average incomes in the bottom 40 percent of the population in each country. This in turn implies that the underlying distribution-sensitive welfare measure currently used by the World Bank to measure “shared prosperity” is mean income in the bottom 40 percent of the income distribution in each country.

Average income in the bottom 40 percent is a welfare measure that is simple to explain. However, it has two key shortcomings. First, it is not subgroup decomposable with population weights. This implies, for example, that average income in the bottom 40 percent of the world cannot be expressed as a population-weighted average of average income in the bottom 40 percent of each country in the world. This is simply because not every person in the bottom 40 percent of the world income distribution is in the bottom 40 percent of the income distribution of the country where they live, and vice versa.<sup>30</sup> This makes the welfare measure less interpretable, because it is not possible to have a global measure that corresponds to a simple aggregation of the same measure at the country level, and similarly, it is not possible to simply decompose the measure across groups of interest within a country.

Second and more importantly, average income in the bottom 40 percent only partially satisfies one of the three definitions of distribution-sensitivity in the literature and fails to satisfy the other two. It is Pigou-Dalton sensitive only with respect to transfers from a person in the top 60 percent to a person in the bottom 40 percent, but not within the bottom 40 percent since the measure is simply mean income within this group. It does not satisfy transfer sensitivity or growth sensitivity. In fact, within the bottom 40 percent, average incomes of the bottom 40 percent inherit the upward-sloping pattern of growth elasticities of mean income, making it a “pro-rich growth” rather than a “pro-poor growth” measure within the bottom 40 percent.

# **4.2 A New Measure of Shared Prosperity**

To address these shortcomings, we propose a new “prosperity gap” to measure shared prosperity. The prosperity gap is defined as the global average shortfall in income from a standard

> 30 In fact, 39 percent of people in the bottom 40 percent of the world income distribution in 2019 are in the top 60 percent of the income distribution of their country, and conversely, 26 percent of the people in the top 60 percent of the world income distribution are in the bottom 40 percent of the income distribution of their country.

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