Cause, Cure for Inequality Lies in Policies

IMF News, October 7, 2016

Source details

Publication date: October 7, 2016
Context: Seminar on inequality, globalization and technology during the IMF-World Bank Annual Meetings in Washington, D.C.
Core message: Inequality within countries is on the rise, and policymakers can combat its economic, social, and political impacts with a mixture of tax policy, income transfers, and education.

"Inequality within countries is on the rise."
"While inequality between countries has declined over the past 20 years, inequality within countries is on the rise."
Globalization has "brought huge gains across countries, lifting millions out of poverty" but domestic policy choices explain "the big differences between countries."
Stagnation of incomes combined with declining social mobility makes inequality "toxic."

Policy choices: "The big differences between countries has nothing to do with globalization, but with the use and misuse of domestic policy." — Tharman Shanmugaratnam, Deputy Prime Minister of Singapore and Minister for Economic and Social Policies.
Technology and labor market change: technology has increased wages at the top and eroded middle-income jobs; "machines are replacing brawn, and replacing brains." — Laura Tyson, Haas School of Business, University of California, Berkeley.
Political and social dynamics: lack of mobility fuels perceptions that globalization, trade, and immigration are sources of individual economic struggle.

Pre-distribution policies emphasized:
- Education
- Access to health care
- Financial inclusion
- Early childhood programs (noted as "the most effective" and producing "the most significant impact on distribution, but also take the longest to mature") — Mauricio Cárdenas, Finance Minister of Colombia.
Redistribution policies:
- Taxes and programs that transfer benefits address inequality and "do not hurt growth."
- IMF research: "there is little evidence that countries’ redistribution policies hinder growth, unless they were extreme."
- IMF advises governments on trade-offs between efficiency and equity when choosing policy mixtures.

Combine tax policy, income transfers, and education to combat inequality, recognizing implementation is "often difficult to achieve."
Invest in lifelong training and skills so workers "complement the technology, rather than being substituted out by the technology." — Laura Tyson.
Pay attention to those "left behind" to ensure globalization is inclusive and "allocates fairly within countries." — Christine Lagarde, IMF Managing Director.
Avoid policy responses that build walls (protectionism, anti-immigration) as they risk worsening regional problems: "Making sure that we solve the problems of inequality [in the United States] by ensuring there is no immigration, or through protectionism—all of that just makes things worse for a region like Latin America." — Mauricio Cárdenas.

Advanced economies are experiencing social and political effects from rising inequality and reduced mobility.
Perception of blocked mobility can be "a bigger problem than income inequality" and contributes to deep divisions over fairness and policy responses. — David Rubenstein, founder of The Carlyle Group.
Political reactions to inequality may lead to anti-trade and anti-immigration sentiments: "The downside is that the reaction of the advanced economies to inequality is building walls." — Cardenas.

Source: IMF NEWS — "Cause, Cure for Inequality Lies in Policies", October 7, 2016.