## Spreading the Wealth

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**Canonical URL:** [Spreading the Wealth](https://www.imf.org/-/media/files/publications/fandd/article/2018/march/bourguignon.pdf)

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### Straight income redistribution
- Taxes on personal income and cash benefits to the poor in developing economies are "almost 10 times lower, as a proportion of GDP, than in advanced economies."
- Conditional cash transfer programs have spread from Latin America (Mexico’s Prospera, Brazil’s Bolsa Família) to other developing regions and have shown it is possible to transfer cash efficiently to poor people.
- New methods of means testing and cash distribution and advances in information technology (particularly mobile money) have improved delivery capacities.
- Current limitations of cash transfer programs:
  - Size: "amounts to 0.5 percent of GDP at most in middle-income countries."
  - In poorer countries: still at the pilot stage.
- Policy measures to expand redistribution:
  - Raise resources through "a higher and more effective income tax in the upper part of the income scale."
  - Leverage the generalized use of bank accounts, credit cards, and debit cards to monitor incomes and reduce tax evasion.
  - Shift emphasis from indirect taxation (more prevalent in developing economies) toward direct taxation; indirect taxes are often regressive and may increase poverty depending on tax-rate structure and household consumption baskets.
  - Replace subsidies for basic goods with income transfers (evidence from pilot replacements of food subsidies by "direct benefit transfers" in some Indian states).
- Efficiency and incentive considerations:
  - Given the limited scope of redistribution in developing economies, it is unlikely to have large negative effects on incentives to work, save, and invest.
  - Substantial income tax progressivity may be achieved with marginal tax rates much below those in advanced economies.
  - Replacing distortionary indirect taxes or subsidies with income transfers should improve efficiency.
  - Conditional cash transfers appear to have no significant negative effect on labor supply and may encourage entrepreneurship.

### Increasing opportunities
- Redistribution should be complemented by direct investments in opportunities that boost poor people's capacity to generate income now and in the future:
  - Education and training
  - Access to health care
  - Micro-credit
  - Water, energy, and transportation infrastructure
  - Social assistance (to prevent poverty traps), e.g., India’s Mahatma Gandhi National Rural Employment Guarantee (state as employer of last resort)
- Conditional cash transfers have been shown to:
  - Motivate families to send children to school
  - Improve nutrition
  - Improve health monitoring
- Additional requirements:
  - Facilities to meet increased demand (schools, health services, etc.) must be available and financed.
  - Financing these opportunity-expanding programs through progressive taxation, while providing cash-transfer incentives, reduces inequality and poverty in the short term and helps households generate more income over medium and long terms.

### Policy trade-offs and broader instruments
- Trade-off between immediate poverty reduction and long-term growth:
  - Pure income redistribution policies reduce poverty immediately but generate less future growth than policies that expand economic opportunities.
  - Policies that enhance opportunities do less to reduce inequality today but lead to faster growth, less poverty, and greater equality tomorrow.
- Other non-redistributive policies that can reduce inequality and foster growth:
  - Minimum wage laws: in developing economies, may increase labor productivity (efficiency wage theory); part of Brazil’s drop in inequality at the turn of the century attributed partly to significant minimum wage increases.
  - Anti-discrimination laws: improve work and training incentives for minority groups.
  - Anti-corruption strategies: reduce rent seeking and likely enhance both growth and income equality (though corruption-driven inequality is often hard to observe).
- Political economy and administrative constraints:
  - Political opposition and administrative capacity limit expansion of redistribution.
  - Modern information technology is likely to improve administrative capacity.
  - Some parties will lose in the short run, making the choice politically difficult.

### Key conclusions and recommendations
- There is a strong case for expanding redistribution in developing economies when growth is satisfactory but poverty reduction is slow.
- Optimal strategy combines:
  - Progressive resource-raising (more effective income taxation of the upper part of the income scale)
  - Well-targeted cash transfers (including conditional cash transfers)
  - Investment in human capital and infrastructure that expand opportunities for the poor
  - Reforms to replace regressive indirect taxes and poorly targeted subsidies with income transfers
  - Complementary policies: minimum wages (judiciously applied), anti-discrimination, and anti-corruption measures
- Expected outcomes of using available instruments:
  - Faster growth, more rapid poverty reduction, and less inequality over the long run
  - Immediate poverty alleviation through transfers, with improved future income-generating capacity through investments in opportunities

*François Bourguignon, professor emeritus at the Paris School of Economics; former World Bank chief economist (2003–2007).*

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