The Economics of Promoting Inclusive Growth
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- Authors: JONATHAN D OSTRY
- Published: June 1, 2018
- Volume: 55
Thesis and overview
- New IMF research argues policymakers should pursue both economic growth and tackling widening inequalities together.
- To ensure sustainable growth, policymakers must promote inclusive policies rather than rely solely on supply-side reforms.
Context and motivation
- The global economy was experiencing its broadest synchronized expansion since 2010 at the time of writing.
- Economists historically emphasized supply-side measures (reducing barriers to entry, more flexible labor markets, liberalization, deregulation) as key to sustaining growth.
- Structural reforms were found to confer sizable benefits for economic growth through: increased overseas capital investment, easier access to credit for local firms, reallocation of capital to more productive uses, improved credit ratings, and longer growth spells.
Costs of inequality
- Since the global financial crisis of 2008, evidence suggests growth is more fragile and less resilient when gains accrue mainly to the wealthiest.
- Mechanisms by which inequality undermines resilience:
- Less social support for corrective policies after adverse shocks if short-term pain is not widely shared.
- Unequal access to education, health care, nutritious food, credit markets, and the political process reduces overall resilience.
- Empirical findings cited:
- Work by Berg and Ostry (2017) found greater likelihood of severe downturns in countries with high or rising inequality in the years and decades before the crisis.
- Concept introduced: macro-distributional view — policymakers should focus simultaneously on the size of the pie and its distribution.
Macro-distributional linkages and economic risks
- Economists previously focused insufficiently on linkages between distribution and macroeconomic outcomes (macro-distributional linkages), analogous to earlier neglect of macro-financial linkages.
- Risks include:
- Secular stagnation (prolonged deficiency in aggregate demand) interacting with secular exclusion (growth accruing only to the top), creating a vicious cycle if median incomes stagnate and polarization intensifies.
Implications for policy design
- Distributional effects are driven in part by policies that are core tools of economists, including macroeconomic policy settings, supply-enhancing reforms, and financial liberalization.
- Policy design should assess impacts on both aggregate growth and distributional consequences.
- Distributional consequences should inform reform design to:
- Better balance winners and losers.
- Increase political durability and legitimacy of reforms.
- Reduce the risk that backlash will lead to protectionism or nationalist responses that undermine growth.
Winners, losers, and political economy
- Reforms create winners and losers; opposition from losers can block reforms and reduce the political viability of reformers (political economy constraint noted by Jean-Claude Juncker).
- Globalization similarly increases aggregate pie but can produce prolonged dislocation for some groups, fueling nativist or protectionist politics.
- Remedies after the fact (redistribution via taxation and transfers) are possible but historically difficult to implement at the scale needed; therefore, preemptive design to mitigate distributional harms is preferable.
Research on trade-offs and policy channels
- Recent work finds some structural reforms entail growth-equity trade-offs; for example, opening to cross-border capital flows tends to increase both growth and inequality.
- Policy implication: do not abandon reforms because of distributional effects; instead, redesign reforms and complementary policies to better share gains.
- One policy approach: ensure the domestic financial sector is inclusive and well regulated so benefits of external financial liberalization are broadly shared.
Urgent policy priorities recommended
- Provide income support for workers displaced by technological change or trade, and offer incentives and opportunities to learn new skills.
- Fiscal policy measures to safeguard political legitimacy of the growth model:
- Ensure regulations are not skewed in favor of the wealthy.
- Increase taxation of rents and estates.
- Cooperate across jurisdictions to stem corporate tax avoidance, tax inversions, and use of tax shelters.
- Strengthen financial market regulation to:
- Prevent insider trading and money laundering.
- Prevent unfair competition and crony capitalism across industry, services, and media.
- Emphasize preemptive action in designing reforms and globalization to account for distributional effects rather than relying primarily on ameliorative measures afterward.
- Principle articulated: Inclusive globalization need not be the same as unbridled globalization.
Key references cited in the piece
- Berg, Andrew, and Jonathan D. Ostry. 2017. “Inequality and Unsustainable Growth: Two Sides of the Same Coin?” IMF Economic Review 65 (4): 792–815.
- Ostry, Jonathan D., Andrew Berg, and Siddharth Kotharti. 2018. “Growth-Equity Tradeoffs in Structural Reforms.” IMF Working Paper 18/5.
- Ostry, Jonathan D., Andrew Berg, and Charalambos G. Tsangarides. 2014. “Redistribution, Inequality and Growth.” IMF Staff Discussion Note 14/02.
- Ostry, Jonathan D., Prakash Loungani, and Andrew Berg. 2018. Confronting Inequality: How Societies Are Free to Choose Inclusive Growth.
- Ostry, Jonathan D., Prakash Loungani, and Davide Furceri. 2018. “Are New Economic Policy Rules Needed to Mitigate Rising National Inequalities?”
Source: F&D Magazine article "Growth or Inclusion?" by Jonathan D. Ostry, June 2018.
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- The Economics of Promoting Inclusive Growth - IMF F&D Magazine
- Рост или инклюзивность? – Финансы и развитие – июнь 2018 года
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- Growth-Equity Trade-offs in Structural Reforms, WP/18/5, January 2018
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