IMF Survey: Broad-based Growth Can Counter Inequality, Instability—Stiglitz

IMF News, October 11, 2011

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Countries should strive to achieve high, broad-based growth to avoid potential political instability triggered by increasing levels of inequality.
An increasing GDP does not necessarily mean that life is getting better for all a country’s citizens; GDP measures market activity but not overall well-being.
GDP is "the subtotal of all the things that people buy and sell, including services and goods" and was developed after the Great Depression as a thermometer of economic activity.
"There are many dimensions to success, and GDP does not measure most of the relevant dimensions. It measures one dimension, but only one."
Important missing dimensions from GDP include:
- Sustainability (e.g., whether a country is selling natural resources, stripping trees, and not reinvesting).
- Inequality (e.g., all income could accrue to a few while most citizens get worse off).
Historical link between inequality and instability illustrated by the pre-2008 United States experience:
- Middle class stagnation limited consumption, prompting lower interest rates and deregulation.
- Resulting housing bubble led to unsustainable household spending and a global aftermath when the bubble broke.
Allowing inequality or unemployment to grow too high increases the risk of political instability.

For low-income countries to promote inclusive growth:
- Develop an inclusive financial system that links to small and medium-sized enterprises and includes microcredit.
- Build an inclusive educational system that reaches both girls and boys and enables citizens to live up to their potential regardless of parental income.
Role of advanced economies and larger institutions:
- Provide assistance to help countries pursue growth policies (many low-income countries lack resources).
- Open up markets to provide not only a handout but "a hand up."
- Reassess policy stances promoted by international organizations when they are counterproductive; avoid deregulation and liberalization done in the wrong way as these can increase instability and produce growth that is not pro-poor.
Stiglitz: "I think those three things would make a very big difference."

Globalization and understanding of it have changed, particularly after the crisis of 2008.
The IMF has been talking much more about inequality than it did a decade ago when discussion was rare at senior levels.
The move from the G-7, G-8, to the G-20 signaled recognition that solving global problems requires bringing in emerging markets.
Concern that the poorest countries receive short shrift as developed countries focus inward on preventing crises in Europe and the United States, reducing attention to making the global system work better.

Interview published: October 11, 2011.
GDP was developed "after the Great Depression" and "has come to be used as a measure of well-being" "67 years ago" from the interview's vantage.
Crisis referenced: 2008.

IMF Survey: Broad-based Growth Can Counter Inequality, Instability—Stiglitz