Inequality and Macro Policy

April 28, 2022

As Prepared for Delivery

Thank you very much David. It is a pleasure to participate in this event with such distinguished fellow panelists. 

Current situation on inequality

As you noted, rising inequality had already been a concern for some time. And unfortunately, the pandemic has exacerbated pre-existing inequalities both within countries—with young, informal workers and women bearing the biggest brunt—and across countries—with low income and fragile countries lagging even more than before. Russia’s invasion of Ukraine has placed another crisis on top of a crisis. Beyond the dreadful humanitarian impact, it is also a massive setback for the global economy.

Rising food and energy prices are affecting poor households more as they spend a larger portion of their income on these two items. Low-income developing countries have less scope to respond—the pandemic already reduced their fiscal space, and they are now confronted with elevated debt levels and tighter financial conditions.

Just last week at our Spring Meetings, we discussed these issues with economic policymakers from around the world. Indeed, concerns about amplified inequality and social tensions were front and center in our discussions.  

Immediate policy priorities

So, what should countries do?

In the near term, policymakers face two complicated tradeoffs: First, reducing inflation is essential—it is after all a tax on the poor. Central banks need to take decisive actions to do that—but they need to do so while also safeguarding the recovery, a difficult balancing act.

The second trade-off concerns fiscal policy. As policymakers begin to rebuild fiscal buffers it is critical to do so while also ensuring continued support for the vulnerable, especially in the context of rising food and energy prices.

Governments can square this circle through policy design anchored in credible medium-term fiscal strategies. They need to mobilize additional revenues, while paying due regard to the distributional consequences of tax reforms. And they need to rationalize and reprioritize spending, while providing well-targeted support for the vulnerable.

Of course, many countries may not be able to do this on their own. In cases where the current environment creates large fiscal and external financing needs, policy space is limited, including because of unsustainable debt burdens, and rapid adjustment would be too costly, the international community will need to step in—from helping to restructure debt, to maintaining access to liquidity, and providing financing and grants.

Long-term policy priorities

In the longer term, it will be important to implement reforms and build strong institutions that increase countries’ resilience to shocks and address the underlying drivers of inequality. There are, of course, various aspects of inequality—income, gender, health, economic opportunity—all of which are closely related and mutually reinforcing. So, policymakers will need a comprehensive approach.

First, let’s look at fiscal policy which requires focus on both pre-distributive and redistributive policies. Pre-distributive policies can help level the playing field before people enter the labor market—through the provision of public education, health services, and basic infrastructure. And re-distributive policies help correct inequalities, for instance, through progressive income tax and social assistance to help people cope with life events.

Second, tackling inequality must also focus on gender‑inclusive policies, because closing gender gaps can stimulate overall growth and reduce income inequality. In advanced economies, this means helping women balance work and family through parental leave, affordable childcare and tax systems that don’t penalize the second earner. In low-income countries, the focus should be on improving access to health, education, finance—and investing in infrastructure such as safe water and transportation.

Third, embracing digitalization and tackling climate change can also offer opportunities to reduce inequality. Digitalization can indeed facilitate access to finance, social assistance, and deliver income support. And the shift to climate-resilient infrastructure is key as the poor often are more vulnerable to extreme climate events.

Of course, policies must also ensure support for workers as they transition from shrinking to expanding sectors. Investment in training, re-skilling and high-quality education will be pivotal to unlocking the potential of both green and digital economies and spreading the benefits more widely, including to the vulnerable segments of our society.

These are all areas critical to enabling economic stability and inclusive growth and hence central to the IMF’s surveillance, lending and capacity development activities.

Let me stop here.