## EXECUTIVE SUMMARY

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---

### Definition and scope
- Economic inclusion: "the broad sharing of the benefits of, and the opportunities to participate in, economic growth." It "embodies equitable outcomes related to financial well-being as well as opportunities in access to markets and resources, and protects the vulnerable."
- Note focus: inequality as a component of inclusion (not the broader inclusion concept such as gender).

### Rationale: why inequality matters for the IMF
- High inequality is negatively associated with macroeconomic stability and sustainable growth—core to the Fund’s mandate in promoting systemic, balance of payments, and domestic stability.
- Macroeconomic policies and reforms can have adverse distributional implications that may undermine public support for reforms.
- Membership demand for Fund engagement on distributional issues and inequality has increased.

### Institutional response and evolution of IMF work
- Since 2015 the IMF adopted a more systematic and structured approach to operationalize work on inequality.
- Actions taken:
  - Launch of a pilot initiative on inequality in 2015.
  - Establishment of an interdepartmental inequality advisory group led by FAD, RES, and SPR to provide analytical and operational support, build and share knowledge, and facilitate external collaboration.
  - Development of tools and delivery of training to country teams.
- Research findings cited:
  - High inequality is harmful for the pace and sustainability of growth; for a given level of redistribution, lower inequality is correlated with faster and more robust growth (Ostry, Berg, and Tsangarides, 2014; Dabla-Norris and others, 2015); impact depends on country specificities (Grigoli, Paredes and Di Bella, 2016).
  - Redistribution generally has a benign impact on growth, and only in extreme cases its growth impact is negative (Ostry, Berg, and Tsangarides, 2014).
  - Spring 2017 World Economic Outlook (IMF, 2017a) documents a downward trend in labor share of income and attributes half of the decline in advanced economies to technological progress and most of the decline in emerging markets to the expansion of global value chains.
  - Clements and others (2015) discuss fiscal policy as a powerful tool for addressing redistributive issues.
  - October 2017 Fiscal Monitor examines (i) tax rates at the top of the income distribution, (ii) the introduction of a universal basic income, and (iii) the role of public spending on education and health.
  - Fabrizio and others (2017) find macro-structural policies aimed at boosting growth in developing countries may have important distributional consequences that can be mitigated by designing reform packages that make pro-growth policies more inclusive.

### Pilot initiative: scope and status
- Two waves covering "29 pilot countries" completed since 2015; a third wave with "16 additional countries" is under way (Annex II: Tables 1 and 2).
- The advisory group supports pilot country teams and will continue to facilitate incorporation of inequality analysis into surveillance where relevant after completion of the third wave.

### Resources, capacity building, and knowledge sharing
- Capacity development and training:
  - Institute for Capacity Development (ICD) has administered courses on inclusive growth and fiscal policy analysis since 2013.
  - Courses on energy subsidy reform include modules on distributional analysis; FAD technical assistance routinely uses distributional analysis in reform design.
- Knowledge exchange:
  - Internal knowledge exchange website (available to IMF staff) contains information on inequality trends, indicators, analytical tools, pilot country work, and selected papers.
- External collaboration:
  - Partnerships with World Bank, OECD, CEQ, DFID, and others leveraged external expertise and tools.

### Analytical tools highlighted
- Tool and template for distributional analysis of energy subsidy reforms (excel and Stata; accompanied by an online course).
- A general equilibrium model developed with DFID to analyze macroeconomic and distributional impacts of diverse policies; model now offers a user-friendly interface for analyzing revenue mobilization policies (for instance VAT or PIT) to finance selected spending programs (such as cash transfers and infrastructure investment).
- CEQ incidence analysis tool and methodology for allocating spending and revenue programs across the population to analyze poverty and distributional impacts.

### Operational guidance for country teams
- Coverage of inequality issues in staff reports should be selective and calibrated to macroeconomic significance.
- Teams should consider relevance to authorities’ priorities; there is "no presumption that inequality will be covered everywhere or every year."
- In-depth coverage expected only in a limited number of cases any year.
- Country team actions:
  - Point to macroeconomic significance where it exists, focusing analysis on aspects with economic implications.
  - Limit specific policy advice to areas where the Fund has expertise.
  - Consider inequality when macro-critical or when policies/reforms could have significant undesirable distributional effects affecting balance of payments or domestic stability; or when requested by member countries.
  - Draw on work by key development partners (e.g., World Bank, OECD) where appropriate.
  - Follow up on in-depth studies by monitoring authorities’ progress in implementing staff recommendations as information becomes available.
- Consistency: note aligns with 2015 Guidance Note for Surveillance under Article IV Consultations and 2013 Guidance Note on Jobs and Growth Issues in Surveillance and Program Work.

### Administrative and publication details
- Date on cover: "June 1, 2018"
- Approved by Sanjaya Panth (SPR).
- Prepared by a team led by Stefania Fabrizio with named contributors from SPR and FAD and supervision and guidance by senior staff.

---

### Pilots’ contribution and country engagement

### Pilots’ contribution to country engagement
- Broadened policy dialogue scope beyond traditional issues, assessing:
  - the impact of inequality on growth and stability in some cases, and
  - the distributional impact of policies and reforms in others.
- Policy traction stronger where inequality was already on authorities’ agendas (examples: China and Malawi).
- Staff could establish macro-criticality where authorities were initially skeptical (notably early-wave pilots) and triggered positive discussions through country-tailored analysis (example: Slovakia).
- Engagement continued into subsequent Article IV discussions in Bolivia, Korea, and Republic of Congo.

### Range of topics covered by the pilots
- Comparative analysis of inequality and poverty outcomes: China, Djibouti, Lithuania, Singapore, Sudan, United States.
- Impact of proposed policy measures on inequality: China, Costa Rica, Ethiopia, Guatemala, Honduras, Malawi, Myanmar, Republic of Congo, Togo, Zambia, United States.
- Regional income inequality: Brazil, Poland, Slovakia.
- Strengths and weaknesses of the social safety net: China, Honduras, Korea, Pakistan.
- Impact of commodity boom-bust on inequality and poverty dynamics: Bolivia, Paraguay.
- Impact of labor market duality on inequality: Korea.

### Drivers of and obstacles to reducing inequality (pilot findings)
- Documented drivers:
  - unequal spatial and social access to public services (example: lack of transport infrastructure in rural areas in the Republic of Congo);
  - labor market "duality" (examples across Korea, Colombia, Israel, Brazil, China, Poland, Slovakia, United States);
  - low financial inclusion (examples: low access to financial services in rural areas of Ethiopia and Myanmar).
- Important obstacles:
  - poorly targeted social spending and subsidies (examples: high leakage in social protection programs in the Kyrgyz Republic and Pakistan);
  - high public spending on an inefficient public pension scheme in Brazil;
  - incidence issues in fiscal policies in Togo.

### Policy recommendations from pilots
- Under tight fiscal conditions, advice emphasized:
  - generating fiscal room through increased revenue mobilization (Republic of Congo, Guatemala, Honduras);
  - introducing or expanding cash transfer programs targeted at the poor;
  - prioritizing public investment in physical and human capital to bridge gaps (transport infrastructure; access to health, education, financial services; low labor skills).
- General guidance:
  - design efficient redistributive policies that do not compromise macroeconomic stability and growth;
  - when macro-structural reforms could have adverse distributional impacts, pair reforms with mitigating policies (e.g., increase financial access, facilitate rural-urban mobility, expand cash transfers where effective social safety nets exist).

### Internal resources, external collaboration, and dissemination
- Pilots used internal resources and external collaboration to overcome data and capacity limitations.
- External support examples:
  - DFID support in Honduras, Ethiopia, Mozambique, Myanmar;
  - collaboration with CEQ for Togo and Zambia;
  - collaboration with ADB for China.
- Pilot outputs featured in Regional Economic Outlooks and flagship publications (examples: Republic of Congo, Korea, Myanmar; Bolivia and United States in Fall 2017 Fiscal Monitor).

---

### Guidance for incorporating inequality in country papers

### Suggested sequence for discussion
- Explain focus on inequality (macroeconomic stability/growth relevance or distributional impact of policies).
- Establish the facts.
- Identify driving forces behind distributional concerns.
- Design policy options to tackle distributional challenges.
- Understand how policies addressing inequality affect macroeconomic stability and growth and vice versa.

### Key diagnostic and policy questions
- How does inequality fit in the overall macroeconomic picture? Are there concerns for macroeconomic stability, growth and its durability?
- Are there policies and reforms for promoting macro-stability and growth that can have an adverse distributional impact? How can it be mitigated?
- How sizeable is inequality? What are the drivers behind inequality developments?
- What are the obstacles to reducing inequality?
- What are the policies to tackle distributional challenges, given policy space, political economy, and implementation capacity?
- How do policy recommendations for addressing inequality fit in the overall policy mix and what are the policy interactions? Country reports should discuss costs and potential impact on macroeconomic stability and growth.

### Boxed country examples — analytical thrusts and findings (selected)
- Bolivia (2016 Article IV):
  - Facts: During 2006–2015, inequality (Gini index) declined sharply. A dynamic stochastic general equilibrium model with sectorial heterogenous agents estimated about two-thirds of the inequality reduction was due to the commodity price boom—one-third directly through rural incomes, and one-third indirectly via higher government revenues enabling expanded social programs.
  - Impact: Without fiscal consolidation, GDP was estimated to shrink by the end of the next decade, poverty reduction would slow, and inequality would increase. Under fiscal consolidation and more efficient social spending, the negative impact on growth would be less than half compared to the no-consolidation scenario and inequality would slightly decrease.
- Ethiopia (2015 Article IV):
  - Facts: Financial sector relatively underdeveloped; large share of funds channeled to finance public enterprises; deposit interest rates negative in real terms; financial services highly concentrated in urban areas.
  - Policy: Complement financial reform with measures to increase rural financial access and facilitate rural–urban mobility; increase cash-transfer program to protect the most vulnerable in the short term.
  - Impact: Model estimates reform package could boost private sector activity and economic growth; private sector credit would increase, pushing down lending rates and increasing investment—which would more than triple—contributing to economic growth and higher tax revenues.
- Poland (2016 Article IV):
  - Facts: Eastern regions have lower per-capita GDP, productivity, and educational attainment, and higher poverty and long-term unemployment.
  - Impact estimate: Poland’s GDP per capita could be increased by 7 percent if one-third of the gap between regions with GDP per capita below average and the four regions above average was closed; this would imply an additional 5 percent convergence to the EU28 average income level.
- United States (2016 and 2017 Article IVs; WP16/121, WP17/244, WP17/192):
  - Findings: Rising income polarization since the turn of the century resulted in a significant loss of private consumption. Tax reform aimed at boosting GDP and jobs could have important distributional effects, further increasing income polarization and reducing the labor share of income; increased budget deficits and debt could negatively affect future generations’ wealth.
  - Model results (dynamic stochastic general equilibrium with sectorial heterogenous agents):
    - personal income tax cuts can provide a one-time boost to GDP, consumption and investment, but effects are not large enough to prevent a loss of revenue;
    - income tax cuts to high income groups can benefit those at the bottom of the earning scale even if they do not receive a tax cut (through impacts on low-skill-job wages not subject to mechanization);
    - a tradeoff between growth and income inequality can arise as tax-rate cuts for higher income groups would increase income inequality and polarization but have larger impact on GDP than tax rate reductions for middle-income groups.
  - Policy option: Personal income tax cuts should be targeted at middle-income groups to obtain some trickle down to lower income individuals while reducing income disparity.

---

### Box 3. Inequality Indicators and their Measurement

### Overview
- Economic inequality is multifaceted; indicator choice depends on analysis focus.
- Use multiple dimensions relevant to the policy issue (example: pre- and post-taxes and transfers; joint analysis of financial inclusion and wealth inequality).

### Types of inequality
- Inequality of income: inter-personal distribution at a point in time (market and disposable income commonly used).
- Inequality of wealth: distribution of wealth across individuals or households.
- Lifetime inequality: inequality in incomes or earnings over an individual's lifetime.
- Inequality of opportunity: relationship between income inequality and social mobility.

### Frequently used measures
- Gini coefficient: ranges from 0 (perfect equality) to 1 (perfect inequality).
- Quintile ratio: ratio of total income (or expenditure) of top 20 percent to bottom 20 percent.
- Generalized entropy: family of measures (also known as Theil’s second measure) decomposable between and within groups.
- Growth incidence curves: plot per capita income (or expenditure) growth at each point of an income distribution between two periods.

### Inequality of opportunities and related indicators
- Indicators capture access to social mobility-related aspects:
  - Access to health or education services by groups across income distribution.
  - Outcome measures such as infant mortality and life expectancy (or educational attainments) by income level.
  - Aggregate indicators such as a Gini index of education outcomes.
  - Access to job opportunities: unemployment by groups (e.g., youth and long-term unemployment).
  - Gender-based inequality in multiple dimensions is strongly associated with income inequality.

### Financial inclusion indicators
- Financial Inclusion indexes include:
  - Number of adults with an account at a formal financial institution.
  - Number of adults that borrowed from a financial institution for different income levels.
- Financial Access Survey (FAS):
  - Conducted since 2009; FAS data and metadata are available at http://data.imf.org/FAS.

---

### Appendix II — Pilots, country details, and good practices

### Third-wave pilots (department listings and notes)
- Department listings include:
  - AFR: Benin 1,2 (2017 Article IV and Selected Issues); Nigeria 2 (2018 Article IV and Selected Issues); Senegal 1; Swaziland 2 (2017 Article IV and Selected Issues).
  - APD: Cambodia; Lao P.D.R.
  - EUR: France; Ireland 2 (2017 Article IV and Selected Issues); Kosovo.
  - MCD: Morocco 1,2 (2018 Article IV and Selected Issues); Tajikistan.
  - WHD: Argentina 2 (2017 Article IV and Selected Issues); Dominica 2 (2017 Article IV and Selected Issues); Dominican Republic 2; Haiti; Peru 1.
- Notes:
  - Three out of the 17 countries participating in the third-wave pilots have a Fund-supported program: Benin (Extended Credit Facility (ECF)), Senegal (Policy Support Instrument (PSI)), Morocco (Precautionary and Liquidity Line (PLL)).
  - 2 Pilot has been completed.

### Good practices and engagement patterns
- Use household survey microdata and Distributional Analysis Stata Package for microdata-based analysis.
- Present findings to authorities during Article IV consultations to foster engagement and uptake (examples: Djibouti, Pakistan, Bolivia, Honduras).
- Coordinate with multilateral partners (World Bank, UNDP, FAO, OECD, IADB) and donors to enhance data access and credibility.
- Models developed by SPR economists and DFID-supported groups contributed to projects (Bolivia, Honduras, Brazil, United States, Guatemala).
- Joint projects with research institutes (e.g., CEQ Institute in Costa Rica) and outreach to CSOs noted as beneficial.

*International Monetary Fund — EXECUTIVE SUMMARY of "How to Operationalize Inequality Issues in Country Work" (excerpts and selected appendices).*

### EXECUTIVE SUMMARY

### pp060118howto-note-on-inequality - EXECUTIVE SUMMARY

### Definition and scope
- Economic inclusion is defined as "the broad sharing of the benefits of, and the opportunities to participate in, economic growth." It "embodies equitable outcomes related to financial well-being as well as opportunities in access to markets and resources, and protects the vulnerable."
- The note focuses on inequality as a component of inclusion (not the broader inclusion concept such as gender).

### Rationale: why inequality matters for the IMF
- High inequality is negatively associated with macroeconomic stability and sustainable growth—core to the Fund’s mandate in promoting systemic, balance of payments, and domestic stability.
- Some macroeconomic policies and reforms may have adverse distributional implications, which can undermine public support for reforms.
- Interest in distributional issues and inequality has grown among the membership, increasing demand for the Fund to engage in these areas.

### Institutional response and evolution of IMF work
- The IMF has adopted a more systematic and structured approach since 2015 to operationalize work on inequality.
- Actions taken include:
  - Launch of a pilot initiative on inequality in 2015.
  - Establishment of an interdepartmental inequality advisory group led by FAD, RES, and SPR to provide analytical and operational support, build and share knowledge, and facilitate external collaboration.
  - Development of tools and delivery of training to country teams.
- Research findings cited in the note:
  - Recent empirical work finds that high levels of inequality are harmful for the pace and sustainability of growth, and conversely, for a given level of redistribution, lower inequality is correlated with faster and more robust growth (Ostry, Berg, and Tsangarides, 2014; Dabla-Norris and others, 2015), though the impact depends on country specificities (Grigoli, Paredes and Di Bella, 2016).
  - Redistribution generally has a benign impact on growth, and only in extreme cases its growth impact is negative (Ostry, Berg, and Tsangarides, 2014).
  - The Spring 2017 World Economic Outlook (IMF, 2017a) documents a downward trend in labor share of income and attributes half of the decline in advanced economies to technological progress and most of the decline in emerging markets to the expansion of global value chains.
  - Clements and others (2015) discuss fiscal policy as a powerful tool for addressing redistributive issues.
  - The October 2017 Fiscal Monitor examines (i) tax rates at the top of the income distribution, (ii) the introduction of a universal basic income, and (iii) the role of public spending on education and health.
  - Fabrizio and others (2017) find that macro-structural policies aimed at boosting growth in developing countries may have important distributional consequences that can be mitigated by designing reform packages that make pro-growth policies more inclusive.

### Pilot initiative: scope and status
- Since 2015, two waves covering "29 pilot countries" have been completed, and a third wave with "16 additional countries" is under way (Annex II: Tables 1 and 2).
- The advisory group supports pilot country teams and will continue to facilitate incorporation of inequality analysis into surveillance where relevant after completion of the third wave.

### Resources, capacity building, and knowledge sharing
- Capacity development and training:
  - Institute for Capacity Development (ICD) has administered courses on inclusive growth and fiscal policy analysis since 2013.
  - Courses on energy subsidy reform include modules on distributional analysis; FAD technical assistance routinely uses distributional analysis in reform design.
- Knowledge exchange:
  - An internal knowledge exchange website (available to IMF staff) contains information on inequality trends, indicators, analytical tools, pilot country work, and selected papers.
- Collaboration with external organizations:
  - Partnerships and complementarities with the World Bank, OECD, CEQ (Commitment to Equity Project), DFID, and others have been used to leverage external expertise and tools.

### Analytical tools highlighted
- Tool and template for distributional analysis of energy subsidy reforms (available in excel and Stata; accompanied by an online course).
- A general equilibrium model developed in partnership with DFID to analyze macroeconomic and distributional impacts of diverse policies; the model now offers a user-friendly interface for analyzing revenue mobilization policies (for instance VAT or PIT) to finance selected spending programs (such as cash transfers and infrastructure investment).
- CEQ incidence analysis tool and methodology for allocating spending and revenue programs across the population to analyze poverty and distributional impacts.

### Operational guidance for country teams
- Coverage of inequality issues in staff reports should be selective and calibrated to macroeconomic significance.
- All teams should consider whether inequality issues are relevant, taking into account the authorities’ priorities, but:
  - There is "no presumption that inequality will be covered everywhere or every year."
  - In-depth coverage is anticipated in only a limited number of cases any year.
- Country teams should:
  - Point to macroeconomic significance where it exists, with analysis focused on aspects with economic implications.
  - Limit specific policy advice to areas where the Fund has expertise.
  - Consider inequality issues when they are macro-critical or when policies/reforms could have significant undesirable distributional effects that could affect balance of payments or domestic stability; or when requested by member countries.
  - Draw on existing work by key development partners (e.g., World Bank, OECD) where appropriate.
  - Follow up where in-depth studies are carried out, monitoring authorities’ progress in implementing staff recommendations and developments over time as information becomes available.
- The note is consistent with the 2015 Guidance Note for Surveillance under Article IV Consultations and the 2013 Guidance Note on Jobs and Growth Issues in Surveillance and Program Work.

### Select administrative and publication details
- Date on cover: "June 1, 2018"
- Approved by Sanjaya Panth (SPR).
- Prepared by a team led by Stefania Fabrizio with named contributors from SPR and FAD and supervision and guidance by senior staff.

*International Monetary Fund — EXECUTIVE SUMMARY of "How to Operationalize Inequality Issues in Country Work"*

### 14.      The experience of inequality pilots created value added in country work.

### 14.      The experience of inequality pilots created value added in country work.

### Pilots’ contribution to country engagement
- Broadened the scope of the Fund’s policy dialogue beyond more traditional issues, helping assess:
  - the impact of inequality on growth and stability in some cases, and
  - the distributional impact of policies and reforms in others,
  - depending on country circumstances and the authorities’ interest.
- Policy traction was encouraging, especially where inequality issues were already on authorities’ agendas (e.g., China and Malawi).
- Staff were able to make the case for macro-criticality where authorities were initially skeptical (notably early-wave pilots) and in some cases triggered positive discussions through country-tailored analysis (e.g., Slovakia).
- Engagement on inequality issues continued into subsequent Article IV discussions in Bolivia, Korea, and Republic of Congo.
- See Annex II for a list of pilot countries, topics, and recommendations.

### Range of topics covered by the pilots
- Comparative analysis of inequality and poverty outcomes: China, Djibouti, Lithuania, Singapore, Sudan, and United States.
- Impact of proposed policy measures on inequality: China, Costa Rica, Ethiopia, Guatemala, Honduras, Malawi, Myanmar, Republic of Congo, Togo, Zambia, and the United States.
- Regional income inequality: Brazil, Poland, and Slovakia.
- Strengths and weaknesses of the social safety net: China, Honduras, Korea, and Pakistan.
- Impact of the commodity boom-bust cycle on inequality and poverty dynamics: Bolivia and Paraguay.
- Impact of labor market duality on inequality: Korea.

### Drivers of and obstacles to reducing inequality (findings from pilots)
- Documented drivers include:
  - unequal spatial and social access to public services (example: lack of transport infrastructure in rural areas in the Republic of Congo);
  - labor market “duality” (examples: inequality between regular and nonregular workers in Korea; between formal and informal workers in Colombia; between communities in Israel; between regions in Brazil, China, Poland, and Slovakia; and between workers in the United States);
  - low financial inclusion (examples: low access to financial services in rural areas of Ethiopia and Myanmar).
- Important obstacles include:
  - poorly targeted social spending and subsidies (examples: high leakage in social protection programs in the Kyrgyz Republic and Pakistan);
  - high public spending on an inefficient public pension scheme in Brazil;
  - incidence issues in fiscal policies in Togo.

### Policy recommendations from pilots
- Under tight fiscal conditions, staff advice emphasized:
  - generating fiscal room through increased revenue mobilization (Republic of Congo, Guatemala, and Honduras);
  - introducing or expanding cash transfer programs targeted at the poor;
  - prioritizing public investment in both physical and human capital to bridge gaps (examples: transport infrastructure; access to health, education, financial services; low labor skills).
- General guidance:
  - design efficient redistributive policies that do not compromise macroeconomic stability and growth;
  - when macro-structural reforms could have adverse distributional impacts, pair reforms with mitigating policies (e.g., increase financial access, facilitate rural-urban mobility, expand cash transfers where effective social safety nets exist).

### Internal resources, external collaboration, and dissemination
- Many pilots benefited from internal resources and external collaboration to overcome data challenges and capacity limitations.
- Examples of external support and collaboration:
  - DFID support for inequality studies in Honduras, Ethiopia, Mozambique, Myanmar, among others;
  - collaboration with CEQ for Togo and Zambia analyses;
  - collaboration with ADB for China analysis.
- Opportunities to leverage local and regional events and to disseminate analysis in various forms (reports, Selected Issue Papers (SIPs), working papers).
- Pilot work featured in the Regional Economic Outlook (examples: Republic of Congo, Korea, Myanmar) and was leveraged in flagship publications such as the Fall 2017 Fiscal Monitor (Bolivia and the United States).

### Guidance for incorporating inequality-related issues in country papers
- Suggested sequence of discussion points:
  - explain the focus on inequality (macroeconomic stability and growth relevance and/or distributional impact of policies);
  - establish the facts;
  - identify driving forces behind distributional concerns;
  - design policy options to tackle distributional challenges;
  - understand how policies addressing inequality would affect macroeconomic stability and growth and vice versa.
- Key diagnostic and policy questions to address:
  - How does inequality fit in the overall macroeconomic picture? Are there concerns for macroeconomic stability, growth and its durability?
  - Are there policies and reforms for promoting macro-stability and growth that can have an adverse distributional impact? How can it be mitigated?
  - How sizeable is inequality? What are the drivers behind inequality developments?
  - What are the obstacles to reducing inequality?
  - What are the policies to tackle distributional challenges, given policy space, political economy, and implementation capacity?
  - How do policy recommendations for addressing inequality fit in the overall policy mix and what are the policy interactions? Country reports should discuss costs and potential impact on macroeconomic stability and growth.

### Boxed country examples (summary of analytical thrusts and findings)
- Bolivia (2016 Article IV):
  - Why focus: Lower commodity prices since 2014 threaten sustaining growth and past reductions in inequality and poverty.
  - Facts: During 2006–2015, inequality (Gini index) declined sharply. A dynamic stochastic general equilibrium model with sectorial heterogenous agents estimated that about two-thirds of the inequality reduction was due to the commodity price boom—one-third directly through rural incomes, and one-third indirectly via higher government revenues enabling expanded social programs.
  - Driving forces: Shrinking fiscal revenues have turned the fiscal balance into deficit; fiscal consolidation is needed but could threaten social spending that supported inequality reduction.
  - Policy options: Greater competition in social service provision and focus on social spending outcomes; better targeting of social assistance requiring administrative capacity building.
  - Impact on macro stability and growth: Without fiscal consolidation, GDP was estimated to shrink by the end of the next decade, poverty reduction would slow, and inequality would increase. Under fiscal consolidation and more efficient social spending, the negative impact on growth would be less than half compared to the no-consolidation scenario and inequality would slightly decrease.
- Ethiopia (2015 Article IV):
  - Why focus: Ambition to increase private sector participation and develop manufacturing; financial sector reform could increase income inequality and the rural–urban gap.
  - Facts: Financial sector relatively underdeveloped; large share of funds channeled to finance public enterprises; deposit interest rates negative in real terms; financial services highly concentrated in urban areas.
  - Driving forces: Reforms could be regressive as rural populations lack financial access and rural–urban mobility is limited; agricultural workers have little opportunity to shift to higher-productivity sectors.
  - Policy options: Complement financial reform with measures to increase rural financial access and facilitate rural–urban mobility; increase cash-transfer program to protect the most vulnerable in the short term.
  - Impact on macro stability and growth: Using a dynamic stochastic general equilibrium model with sectorial heterogenous agents, staff estimated the reform package could boost private sector activity and economic growth; higher deposit rates would increase private saving, private sector credit would increase, pushing down lending rates and increasing investment—which would more than triple—contributing to economic growth and higher tax revenues, allowing reduced borrowing and contained public debt financing costs.
- Poland (2016 Article IV):
  - Why focus: Strong recent performance, but enduring regional disparities—eastern regions lag western regions—undermining convergence to EU average income levels.
  - Facts: Eastern regions have lower per-capita GDP, productivity, and educational attainment, and higher poverty and long-term unemployment rates.
  - Driving forces: Large agricultural sector concentrated in the east, lower-quality infrastructure, and cross-regional mobility bottlenecks perpetuate productivity gaps.
  - Policy options: Support structural transformation in the east, facilitate labor mobility, and attract Foreign Direct Investments (FDI) to less productive regions.
  - Impact on macro stability and growth: The team estimated Poland’s GDP per capita could be increased by 7 percent if one-third of the gap between regions with GDP per capita below average and the four regions above average was closed. This would imply an additional 5 percent convergence to the EU28 average income level. Boosting labor productivity growth in lagging regions is key to reducing regional disparities.
- United States (2016 and 2017 Article IVs; working papers WP16/121, WP17/244, WP17/192):
  - Why focus: Increased inequality and income polarization may have contributed to lower productivity growth and potential GDP; studies examined rising income polarization’s macro effects and the distributional impact of contemplated income tax reform.
  - Findings: Rising income polarization since the turn of the century resulted in a significant loss of private consumption. Tax reform aimed at boosting GDP and jobs could have important distributional effects, further increasing income polarization and reducing the labor share of income; increased budget deficits and debt could negatively affect future generations’ wealth.
  - Facts: US economy undergoing one of its longest expansions in history, but growth prospects constrained by weak productivity growth, falling labor participation, increasingly polarized income distribution, and high levels of poverty.
  - Driving forces: Personal income tax reductions for high-income groups might not generate sufficient trickle-down benefits for medium and bottom earners.
  - Policy options: Personal income tax cuts should be targeted at middle-income groups to obtain some trickle down to lower income individuals while reducing income disparity.
  - Model results (dynamic stochastic general equilibrium with sectorial heterogenous agents):
    - personal income tax cuts can provide a one-time boost to GDP, consumption and investment, but effects are not large enough to prevent a loss of revenue;
    - income tax cuts to high income groups can benefit those at the bottom of the earning scale even if they do not receive a tax cut (through impacts on low-skill-job wages not subject to mechanization);
    - a tradeoff between growth and income inequality can arise as tax-rate cuts for higher income groups would increase income inequality and polarization but have larger impact on GDP than tax rate reductions for middle-income groups.

*International Monetary Fund — HOW TO OPERATIONALIZE INEQUALITY ISSUES IN COUNTRY WORK*

### Box 3. Inequality Indicators and their Measurement

### Box 3. Inequality Indicators and their Measurement

### Overview
- Economic inequality is multifaceted; choice of indicators depends on the analysis focus.
- It is advisable to consider multiple dimensions relevant to the policy issue (example: pre- and post-taxes and transfers to assess primary income distribution and effectiveness of tax/transfers; joint analysis of financial inclusion and wealth inequality to inform policies to enhance access to financial services).

### Types of Inequality (concepts to consider)
- Inequality of income: inter-personal distribution of income across the population at a point in time. Income definition can vary (market and disposable income are commonly used aggregates).
- Inequality of wealth: distribution of wealth across individuals or households, reflecting differences in savings, bequests, and inheritances.
- Lifetime inequality: measures inequality in incomes or earnings for an individual over his or her lifetime rather than for a single year.
- Inequality of opportunity: relationship between income inequality and social mobility.

### Frequently used measures of inequality
- Gini coefficient
  - Measures dispersion of a frequency distribution.
  - Ranges from 0 (all individuals have the same resources/endowment — perfect equality) to 1 (all resources/endowment are held by only one person in the population — perfect inequality).
- Quintile ratio
  - The quintile income (or expenditure) ratio is the ratio of the total income (or expenditure) of the top (richest) 20 percent of the population to that of the bottom (poorest) 20 percent.
  - More generally, income ratios can be computed for different population shares.
- Generalized entropy
  - One member of a family of measures derived from the notion of entropy in information theory.
  - Also known as Theil’s second measure and can be decomposed to measure inequality between and within groups.
- Growth incidence curves
  - Plot per capita income (or expenditure) growth at each point of an income distribution between two periods.

### Inequality of opportunities and related indicators
- Inequality of opportunities indicators capture access to aspects related to social mobility, including:
  - Access to health or education services by groups in different parts of the income distribution.
  - Outcome measures such as infant mortality and life expectancy (or educational attainments) by different levels of income.
  - Aggregate indicators such as a Gini index of education outcomes.
  - Access to job opportunities, captured by indicators such as unemployment by groups (for example youth and long-term unemployment).
  - Gender-based inequality in multiple dimensions (economic participation, education, health, financial access) is strongly associated with income inequality.

### Financial inclusion indicators
- Financial Inclusion indexes include:
  - Number of adults with an account at a formal financial institution.
  - Number of adults that borrowed from a financial institution for different income levels.
- The Financial Access Survey (FAS) is a comprehensive source of information on financial access and inclusion.
  - FAS has been conducted since 2009; FAS data and metadata are available at http://data.imf.org/FAS.

*Source: Box 3. Inequality Indicators and their Measurement, "How to Operationalize Inequality Issues in Country Work" (excerpt).*

### Appendix II

### Appendix II

### Overview
- Title referenced: “Growth Inclusiveness: Distributional and Gender Dimensions” (forthcoming).
- WP “Growth inclusiveness in Djibouti,” by A. Kireyev:
  - Based on household surveys provided by the authorities of Djibouti.
  - Uses the Distributional Analysis Stata Package. (WB, UNDP and Université Laval).
  - Findings were presented to the authorities during the 2016 Article IV Consultations.
  - Methodology can be applied to many countries, provided household surveys are available.
  - A WP presenting the methodology in a general context is in preparation.

### Country pilots — selected entries and salient details
- Kyrgyz Republic:
  - Focus: Benchmarking and cross-country analysis to identify policies for reducing inequality.
  - Output/status: 2015 Article IV Staff Report.
  - Sources: SIP.
  - Engagement/Good practices: WB, UNDP, FAO. Given importance of program issues, inequality discussions were not extensive.

- Mauritania:
  - Focus: Growth inclusiveness.
  - Output/status: 2015 Article IV Staff Report.
  - Sources: SIP.
  - Engagement/Good practices: Issues discussed with the authorities during the Article IV mission.

- Pakistan (Volunteer):
  - Focus: Assessment of poverty, inequality, and the role and efficiency of social safety nets.
  - Output/status: 2017 Article IV Report and SIP.
  - Sources: World Bank database on social safety nets (ASPIRE) and development indicators.
  - Engagement/Good practices: Team interacted with Pakistani authorities and FAD on social safety nets issues. Authorities were actively engaged in providing detailed information on safety net programs. Findings were presented to the authorities during the Article IV discussions (April 2017). Coordination and cooperation with the authorities and the World Bank.

- Sudan (Volunteer):
  - Focus: Assessment of the challenges of inclusive growth and its policy options.
  - Output/status: 2016 Art. IV report Annex.
  - Sources: Fund (SDNs) and World Bank (World Development Indicators).

- Bolivia (WHD):
  - Focus: Empirical analysis of factors driving poverty and inequality reduction in the last 15 years; impact of the commodity boom-bust cycle on inequality and poverty dynamics and appropriate policy responses.
  - Output/status: 2015 Art. IV report (1 paragraph and 1 Box); WP; 2016 Art. IV report (1 paragraph and 2 Boxes); WP.
  - Engagement/Good practices: Issues and results presented to authorities and discussed during Article IV mission. Model presented at donors meeting and IMF workshop; authorities interested in municipal-level analysis. Paper presented at the LAEC Annual Conference in Santa Cruz in October 2015. Donor community appreciative of the inequality work. Project benefited from a model developed by SPR economists and the DIFD-supported group.

- Brazil (WHD):
  - Focus: Regional inequality, policies driving inequality; impact of pension reforms on inequality.
  - Output/status: Ongoing work; SIP and WP for the 2017 Art. IV.
  - Sources: Numerous references to studies published by the IMF, WB, and Brazilian think tanks, research institutes, and academia.
  - Engagement/Good practices: Topic received interest from authorities and CSOs; wealth of data and literature on inequality in Brazil. In-depth collaboration with the WB, academia, and experts. Project benefited from a model developed by SPR economists and the DIFD-supported group.

- Colombia:
  - Focus: Drivers of inequality and financial inclusion.
  - Output/status: 2015 Article IV Staff Report; SIP.
  - Sources: WB, OECD, IADB.
  - Engagement/Good practices: Engagement with the authorities was very positive and outputs well received.

- Costa Rica (Volunteer):
  - Focus: Impact of the proposed fiscal reform package on poverty and inequality using household survey micro-data.
  - Output/status: SIP for the 2017 Art. IV (June 2017).
  - Sources: Projects based on the latest household survey.
  - Engagement/Good practices: Authorities expressed substantial interest. Joint project with the CEQ Institute.

- Guatemala:
  - Focus: Macroeconomic and distributional effects of fiscal policies and improved financial inclusion on poverty and inequality.
  - Output/status: 2016 Art. IV report (1 Paragraph and 2 Boxes); SIP.
  - Sources: Latest household survey microdata.
  - Engagement/Good practices: Substantial interest from authorities. Project benefited from a model developed by SPR economists and the DIFD-supported group.

- Honduras (WHD):
  - Focus: Impact of tax reforms, improved macroeconomic stability, and enhanced social protection framework on growth and inequality.
  - Output/status: 2016 Art. IV report (1 Paragraph and 1 Box); WP (summer 2017).
  - Engagement/Good practices: Project benefited from a model developed by two SPR economists who extensively contributed to the project. Results presented during the Article IV mission in 2016. Authorities were interested and agreed with the analysis. Project benefited from a model developed by SPR economists and the DIFD-supported group.

- United States:
  - Focus: Effects and trends in income polarization; effects of tax reform on Inequality.
  - Output/status: 2016 Art. IV report (Box); WP; 2017 Art. IV report; WP.
  - Engagement/Good practices: Project benefited from a model developed by SPR economists and the DIFD-supported group.

### Third-wave pilots (Table 2 — country list and notes)
- Department listings (countries shown with annotations where present):
  - AFR: Benin 1,2 (2017 Article IV and Selected Issues); Nigeria 2 (2018 Article IV and Selected Issues); Senegal 1; Swaziland 2 (2017 Article IV and Selected Issues).
  - APD: Cambodia; Lao P.D.R.
  - EUR: France; Ireland 2 (2017 Article IV and Selected Issues); Kosovo.
  - MCD: Morocco 1,2 (2018 Article IV and Selected Issues); Tajikistan.
  - WHD: Argentina 2 (2017 Article IV and Selected Issues); Dominica 2 (2017 Article IV and Selected Issues); Dominican Republic 2; Haiti; Peru 1.
- Notes:
  - Three out of the 17 countries participating in the third-wave pilots have a Fund-supported program. These are Benin (Extended Credit Facility (ECF)), Senegal (Policy Support Instrument (PSI)), and Morocco (Precautionary and Liquidity Line (PLL)).
  - 2 Pilot has been completed.

### Good practices and engagement patterns (synthesized from pilots)
- Use of household survey microdata and Distributional Analysis Stata Package for microdata-based analysis.
- Presentation of findings to authorities during Article IV consultations fosters engagement and uptake (examples: Djibouti, Pakistan, Bolivia, Honduras).
- Coordination with multilateral partners (World Bank, UNDP, FAO, OECD, IADB) and donors enhances data access and credibility.
- Development and use of models by SPR economists and DIFD-supported groups contributed to several projects (Bolivia, Honduras, Brazil, United States, Guatemala).
- Joint projects with research institutes (e.g., CEQ Institute in Costa Rica) and outreach to CSOs noted as beneficial.

*International Monetary Fund — Appendix II, “Growth Inclusiveness: Distributional and Gender Dimensions” (excerpts and tabulated pilot details).*

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_Source: https://www.imf.org/-/media/files/publications/pp/2018/pp060118howto-note-on-inequality.pdf_