## Growth or Inclusion?

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**Canonical URL:** [Growth or Inclusion?](https://www.imf.org/-/media/files/publications/fandd/article/2018/june/ostry.pdf)

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### Context and framing
- Global economy experiencing its broadest synchronized expansion since 2010, with further gains forecast for this year and next.
- Traditional emphasis: improving the supply side (reducing barriers to entry in product markets; making labor markets more flexible) as key to sustaining growth.
- Recent critique: supply-side policies alone may be insufficient because non-inclusive growth is more fragile and less resilient.

### Costs of inequality
- Unequal societies may offer less support for policies that address adverse shocks because short-term pain does not bring broadly shared longer-term gains.
- Inequality reduces equality of opportunity: unequal access to education, health care, nutritious food, credit markets, and the political process makes societies less resilient.
- Evidence cited:
  - Economists (Raghuram Rajan, Joseph Stiglitz) link growing inequality to the 2008 crisis.
  - Berg and Ostry 2017: higher likelihood of succumbing to a severe downturn in countries with high or rising inequality in the years and decades before the crisis.
- Conceptual risk: secular stagnation (prolonged deficiency in aggregate demand) can interact with secular exclusion (growth accruing mainly to the top), creating a vicious cycle if median incomes stagnate and polarization intensifies.

### Implications for policy
- The macro-distributional view: policymakers should focus simultaneously on the size of the pie and its distribution.
- Rising inequality is driven in part by policy choices—macroeconomic policies (tax progressivity, infrastructure spending, monetary policy effects on asset prices) and supply-enhancing reforms—so distributional impacts must be assessed at the design stage.
- Assessment of reforms should consider both aggregate benefits and distributional consequences to avoid undermining political support for reforms.
- Redistribution after the fact (taxation and transfers) is an option, but history suggests governments often struggle to undertake needed redistribution in practice.

### Winners and losers in reforms and globalization
- Structural reforms and globalization produce winners and losers; opposition from losers can frustrate reform implementation.
- Quote capturing political difficulty: “We all know what to do; we just don’t know how to get reelected after we’ve done it.” (Jean-Claude Juncker)
- Example finding: opening the economy to cross-border capital flows tends to increase both growth and inequality.
- Policy implication: do not use distributional consequences as a reason to roll back reforms; instead, design reforms to better balance winners and losers and credibly share gains.

### Urgent priorities and policy recommendations
- Public policies should:
  - Provide income support for workers displaced by technological change or trade.
  - Provide incentives and opportunities to learn new skills.
- Fiscal and regulatory actions should:
  - Safeguard political legitimacy of the growth model by ensuring regulations are not skewed in favor of the wealthy.
  - Increase taxation of rents and estates where appropriate.
  - Pursue cooperative efforts across jurisdictions to stem corporate tax avoidance, tax inversions, and the use of tax shelters.
- Financial-sector and market regulations should:
  - More aggressively regulate financial markets to prevent insider trading and money laundering.
  - Ensure regulations prevent unfair competition and crony capitalism across industry, services, and the media.
- Design principle: take preemptive action on inclusion when designing reforms and globalization, rather than relying primarily on ameliorative measures after the fact.
- Normative point: inclusive globalization need not be the same as unbridled globalization.

### Research and evidence base cited
- Berg, Andrew, and Jonathan D. Ostry. 2017. “Inequality and Unsustainable Growth: Two Sides of the Same Coin?” IMF Economic Review 65 (4): 792–815.
- Ostry, Jonathan D., Andrew Berg, and Siddharth Kotharti. 2018. “Growth-Equity Tradeoffs in Structural Reforms.” IMF Working Paper 18/5.
- Ostry, Jonathan D., Andrew Berg, and Charalambos G. Tsangarides. 2014. “Redistribution, Inequality and Growth.” IMF Staff Discussion Note 14/02.
- Ostry, Jonathan D., Prakash Loungani, and Andrew Berg. 2018. Confronting Inequality: How Societies Are Free to Choose Inclusive Growth.
- Ostry, Jonathan D., Prakash Loungani, and Davide Furceri. 2018. “Are New Economic Policy Rules Needed to Mitigate Rising National Inequalities?”

*Jonathan D. Ostry, deputy director of the IMF’s Research Department (content from the IMF Finance & Development, June 2018).*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2018/june/ostry.pdf_