Inequality and Macro Policy
IMF News, April 28, 2022
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- Published: April 28, 2022
Current situation on inequality
- Rising inequality was a concern before the pandemic; the pandemic has exacerbated pre-existing inequalities within countries and across countries.
- Within countries: young, informal workers and women have borne the biggest brunt.
- Across countries: low income and fragile countries are lagging even more than before.
- Russia’s invasion of Ukraine is described as "another crisis on top of a crisis" and "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 because "the pandemic already reduced their fiscal space, and they are now confronted with elevated debt levels and tighter financial conditions."
- Issues of amplified inequality and social tensions were central in discussions at the Spring Meetings.
Immediate policy priorities
- Two near-term tradeoffs for policymakers:
- Reducing inflation is essential—"it is after all a tax on the poor." Central banks need to take decisive actions to reduce inflation while safeguarding the recovery.
- Fiscal policy trade-off: as policymakers rebuild fiscal buffers, they must ensure continued support for the vulnerable amid rising food and energy prices.
- Policy design recommendations to "square this circle":
- Anchor policies in credible medium-term fiscal strategies.
- Mobilize additional revenues while "paying due regard to the distributional consequences of tax reforms."
- Rationalize and reprioritize spending, while providing well-targeted support for the vulnerable.
- Role of international community where country capacity is limited:
- Support ranges from helping to restructure debt, to maintaining access to liquidity, and providing financing and grants.
- Applies when "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.
Long-term policy priorities
- Need for reforms and strong institutions to increase resilience to shocks and address underlying drivers of inequality.
- Comprehensive approach required across various aspects of inequality: income, gender, health, and economic opportunity.
- Fiscal policy—focus on both pre-distributive and redistributive measures:
- Pre-distributive: level the playing field before people enter the labor market through public education, health services, and basic infrastructure.
- Redistributive: correct inequalities through progressive income tax and social assistance to help people cope with life events.
- Gender-inclusive policies:
- In advanced economies: help women balance work and family through parental leave, affordable childcare and tax systems that don’t penalize the second earner.
- In low-income countries: improve access to health, education, finance—and invest in infrastructure such as safe water and transportation.
- Opportunities from digitalization and climate action:
- Digitalization can facilitate access to finance, social assistance, and deliver income support.
- Shift to climate-resilient infrastructure is key because the poor are often more vulnerable to extreme climate events.
- Support for workers in transition:
- Invest in training, re-skilling and high-quality education to unlock potential of green and digital economies and spread benefits more widely, including to vulnerable segments.
- These areas are central to the IMF’s surveillance, lending and capacity development activities.
Opening Remarks at the 2022 Global Empowerment Meeting by Deputy Managing Director Antoinette M. Sayeh (At Harvard Kennedy School’s Center for International Development, April 28, 2022).