Reduce Inequality To Create Opportunity

IMF Blog, January 7, 2020

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Over the past decade, inequality has become one of the most complex and vexing challenges in the global economy: inequality of opportunity, inequality across generations, inequality between women and men, and inequality of income and wealth.
The good news is we have tools to address these issues, provided we have the will to do so.
Despite the political difficulty of implementing reforms the payoffs for growth and productivity are worth the effort.

Fiscal policies and progressive taxation:
- Progressive taxation is a key component of effective fiscal policy.
- At the top of the income distribution, our research shows that marginal tax rates can be raised without sacrificing economic growth.
- Utilizing digital tools in tax collection can boost domestic revenue.
- Reducing corruption can both improve collection and increase trust in government.
- These strategies can secure the necessary resources to invest in expanding opportunities for communities and individuals that have been falling behind.
Gender budgeting:
- Gender budgeting is a fiscal tool to structure spending and taxation to advance gender equality.
- It can increase women’s participation in the work force and, in turn, boost growth and stability.
Social spending policies:
- When done right they can mitigate income inequality and its detrimental effects on inequality of opportunity and social cohesion.
- Education prepares young people to become productive adults.
- Health care saves lives and can improve the quality of life.
- Pension programs can allow the elderly to preserve their dignity in old age.

A new IMF study shows that the required scaling-up of social spending varies widely across countries.
Estimated additional annual spending required in key areas such as health, education, and priority infrastructure:
- Emerging market economies: about 4 percentage points of GDP in 2030.
- Average low-income developing country: 15 percentage points of GDP.

Reforms to the structure of the economy can reduce adjustment costs, minimize regional disparities, and prepare workers for green jobs.
Active labor market policies:
- Job search assistance, training programs, and in some instances, wage insurance can augment workers’ skills and reduce unemployment spells.
Facilitating worker mobility:
- Mobility across firms, industries, and regions minimizes adjustment costs and promotes rapid re-employment.
- Housing, credit, and infrastructure policies can support worker mobility.
Geographically-targeted policies and investments can complement existing social transfers.

The IMF’s efforts to tackle inequality are embedded in surveillance, lending, research, and capacity development work.
A cornerstone of the IMF approach is the social spending strategy.
Guiding principles for social spending engagement:
- Social spending needs to be adequate, yet also efficient and sustainably financed.
- If social spending is inadequate to achieve the SDGs or to protect a significant share of poor and vulnerable households, then it needs to be increased.
- Changing demographics will push issues of fiscal sustainability to the forefront, including health and pension spending.
- Mitigating the adverse effects of adjustment on the poor and vulnerable is an important objective.

Egypt: During the implementation of the IMF-supported program, Egypt more than doubled its coverage of cash transfers, reaching 2.3 million households.
Ghana: IMF engagement helped create room in the budget to increase spending on public education to achieve the goal of universal secondary education.
Japan: The IMF advised Japan on developing options for pension reform, necessary for its aging society.
The IMF is weaving its social spending strategy into the fabric of its work to tailor engagement to country-specific preferences and circumstances.

Effective engagement requires partnerships among international organizations, academics, country authorities, civil society, and the private sector.
Examples of collaboration:
- Engagement with G7 Labor Ministers on social, employment, and labor issues to inform policy advice.
- International organizations like the World Bank and International Labor Organization provide invaluable knowledge on social spending.
- Civil society, academics, think tanks, and labor unions offer perspectives that enrich views and help avoid groupthink.
There is no one-size-fits-all approach; countries have different preferences, challenges, and aspirations, and working together increases the likelihood of asking the right questions and finding the right answers.

Kristalina Georgieva — January 7, 2020