## Treating Inequality with Redistribution: Is the Cure Worse than the Disease?

_IMF Blog, February 26, 2014_

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## Bibliographic details
- Authors: Jonathan D Ostry, Andrew G Berg
- Published: February 26, 2014

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### Context and research question
- Publication: February 26, 2014
- Authors: Jonathan D. Ostry, Andrew G. Berg
- Problem framed: rising income inequality poses social, political, and economic risks (undermining access to health and education, causing investment-reducing political and economic instability, and thwarting the social consensus required to adjust in the face of major shocks).
- Core empirical question: What do historical cross-country data say about the macroeconomic effects of redistributive policies—directly on growth and indirectly via reduced inequality?
- Methodological highlight: use of a new cross-country data set distinguishing net (post-tax and transfers) inequality from market (pre-tax and transfers) inequality, allowing calculation of redistributive transfers for many countries over time; analysis focuses on average growth during five-year periods and the sustainability/duration of growth.

### Key empirical findings
- Inequality’s role:
  - Inequality is a robust and powerful determinant of both the pace of medium-term growth and the duration of growth spells, even when controlling for the size of redistributive transfers.
  - Conclusion: focusing solely on growth while ignoring inequality risks producing low and unsustainable growth; “Inequality and unsustainable growth may be two sides of the same coin.”
- Redistribution’s effects:
  - Historical data show remarkably little evidence that typical fiscal redistribution has adverse effects on growth.
  - The average redistribution, and the associated reduction in inequality, are robustly associated with higher and more durable growth.
  - There are mixed signs that very large redistributions may have direct negative effects on growth duration; when these direct effects are netted with the positive indirect effects through lower inequality, the overall effect is roughly growth-neutral.
- Tradeoff assessment:
  - Little evidence of a “big tradeoff” between redistribution and growth in the historical macroeconomic data used.

### Interpretation and caveats
- Possible explanation: countries that have implemented redistributive policies may have designed them in a reasonably efficient way.
- Important caveats emphasized by the authors:
  - Efficiency matters: governments wishing to enhance fiscal redistribution should attend to efficiency considerations, especially where governance and administrative capacity are weak.
  - Heterogeneity: different types of redistributive policies can have different effects across countries and over time.
  - Limits of cross-country regression analysis: causality is difficult to establish with full confidence; historical and theoretical arguments imply that beyond some point redistribution can be destructive and extreme equality may also be harmful to growth.
  - Planned follow-up: a forthcoming IMF paper will delve into fiscal design and implementation issues.

### Policy implications (practical takeaways)
- On average, typical government redistribution has not led to bad growth outcomes and associated equality appears to have supported faster and more durable growth.
- Inaction in the face of high inequality thus seems unlikely to be warranted in many cases.
- Policy design priorities:
  - Prioritize efficient design of taxes and spending instruments to achieve redistribution, particularly in countries with weak governance and administrative capacity.
  - Recognize that scale and composition of redistribution matter—very large redistributions may warrant careful assessment of direct growth effects.
  - Account for country-specific contexts: choose redistributive instruments mindful of timing, institutional capacity, and differing country circumstances.

*IMF blog post: Treating Inequality with Redistribution: Is the Cure Worse than the Disease? (February 26, 2014)*

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## Content in this bundle

- **Staff Discussion Note**
  - [Staff Discussion Note (Markdown version)](/external/pubs/ft/sdn/2011/sdn1108.pdf.md){rel="alternate" type="text/markdown"}
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- **Staff Discussion Note**
  - [Staff Discussion Note (Markdown version)](/external/pubs/ft/sdn/2014/sdn1402.pdf.md){rel="alternate" type="text/markdown"}
  - [Staff Discussion Note (PDF)](/external/pubs/ft/sdn/2014/sdn1402.pdf){rel="external" type="application/pdf"}

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_Source: https://www.imf.org/en/blogs/articles/2014/02/26/treating-inequality-with-redistribution-is-the-cure-worse-than-the-disease_