IMF Survey : All Will Benefit from Steps to Cut Excessive Inequality—Lagarde

IMF News, June 17, 2015

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“If you lift the income share of the poor and middle class by 1 percentage point, then GDP growth increases by as much as 0.38 percentage points in a country over five years.”
“By contrast, if you lift the income share of the rich by 1 percentage point, then GDP growth decreases by 0.08 percentage points.”
“Our findings suggest that—contrary to conventional wisdom—the benefits of higher income are trickling up, not down.”
Earlier IMF research shows that excessive income inequality “drags down the economic growth rate and makes growth less sustainable over time.”
Divergence noted between a steady, decades-long fall in inequality between countries (driven by rapidly rising average incomes in emerging market economies) and growing income inequality within countries.

Main drivers of the widening earnings gap between higher- and lower-skilled individuals, especially in advanced economies:
- technological progress;
- financial globalization.
Other contributing factors:
- overreliance on credit finance;
- low social mobility;
- inequality of access to education, health care, and financial services, especially in developing economies.
Consequence: “With these kinds of disadvantages—with this kind of inequality of opportunity—millions of people have little or no chance of earning higher incomes and building up wealth.”

Macroeconomic stability: “Sound macroeconomic policies are the poor’s best friend,” supported by good governance, since corruption can be a strong indicator of profound social and economic inequality.
Prudent policies that balance promoting greater equality and preserving incentives to compete, innovate, and invest.
Fiscal adjustments, including:
- clamping down on tax evasion;
- removing unfair tax relief;
- reducing high labor taxes;
- relying more on conditional cash transfers;
- freeing up resources by reducing energy subsidies.
Smart structural reforms in:
- education;
- health care;
- labor markets;
- infrastructure;
- financial inclusion.
Timing opportunity: later this year policymakers have a “once-in-a-generation opportunity for development” with the United Nations Sustainable Development Goals summit in September and a summit in December to seek a deal to cut carbon emissions.

The IMF’s mandate: promote global economic and financial stability; support development by helping its 188 member countries design and implement policies and by lending to countries in times of distress.
Example: in sub-Saharan Africa many countries have applied sound macroeconomic policies over the past decade and are reaping benefits in the form of stronger growth and higher living standards.
IMF support instruments and focus:
- new instruments such as zero-interest loans;
- increased financing and capacity building;
- stepping up research on inequality, gender, and climate-related issues;
- looking into increasing access to its loans for developing countries to help them buffer external shocks;
- aiming to increase focus on helping the poorest and most fragile countries.

Source: IMF Survey, June 17, 2015.