Redistribution of Income and Reducing Economic Inequality
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- Authors: FRANCOIS BOURGUIGNON
- Published: March 1, 2018
Main thesis and context
- "The redistribution of income might achieve not only greater equality but also faster growth and, for developing economies, faster poverty reduction."
- After years of quasi-neglect, economic inequality has taken center stage in the policy debate worldwide.
- In advanced economies concerns include the apparent impact of globalization and technological change; in developing economies the issue is whether inequality poses a major obstacle to raising growth and reducing poverty.
- Redistributive policies could also help narrow the gap between rich and poor where social and political tensions or the rise of populist regimes might be bad for long-run growth.
Straight income redistribution: instruments, scale, and limitations
- Principal instruments: progressive taxation, cash transfers (including conditional cash transfers), and direct income transfers.
- Cash transfer programs:
- Examples noted: Mexico’s Prospera (previously Progresa), Brazil’s Bolsa Família.
- Demonstrated feasibility of efficient cash transfers in developing economies.
- New methods of means testing and cash distribution and advances in information technology (particularly mobile money) improve delivery.
- Current size limitation: "0.5 percent of GDP at most in middle-income countries."
- In poorer countries, many programs "are still at the pilot stage."
- Taxation:
- "On average, taxes on personal income and cash benefits to the poor are almost 10 times lower, as a proportion of GDP, than in advanced economies."
- Expanding transfers requires more resources; "a higher and more effective income tax in the upper part of the income scale could help raise the necessary funds."
- Wider use of bank accounts, credit cards, and debit cards among higher-income people should make it easier to monitor personal incomes and reduce tax evasion.
- Indirect taxation and subsidies:
- Developing economies rely relatively more on indirect taxation of domestic and imported goods and services.
- Indirect taxes are described as regressive and "may even increase poverty depending on the structure of tax rates and the consumption basket of households."
- Lowering taxes on goods that weigh more in poor people’s budgets achieves relatively little redistribution because wealthier people also consume these goods.
- Income transfers are preferable to subsidies because they "cost less and are better targeted to the truly needy," supported by pilot experiments replacing food subsidies with "direct benefit transfers" in some Indian states.
Increasing opportunities: dynamic policies that complement redistribution
- Principle: Transfers should not be purely cash; they should "boost people’s capacity to generate income, today and in the future."
- Recommended investments and services:
- Education and training
- Access to health care
- Micro-credit
- Water, energy, and transportation infrastructure
- Social assistance (example: India’s Mahatma Gandhi National Rural Employment Guarantee as employer of last resort)
- Conditional cash transfers:
- Proven to motivate school attendance, improve nutrition, and monitor health.
- Require concurrent expansion and financing of facilities to meet increased demand.
- Financing strategy:
- Finance opportunity-expanding programs through progressive taxation while providing cash-transfer incentives to households.
- This approach reduces inequality and poverty in the short term and supports income generation over the medium and long term.
- Efficiency and incentives:
- Given the limited scope of redistribution in developing economies, it is "unlikely that it would have much effect on economic incentives."
- "Substantial income tax progressivity may indeed be achieved with marginal tax rates much below those in advanced economies."
- Replacing distortionary indirect taxes or subsidies with income transfers should improve efficiency.
- Evidence cited: conditional cash transfers "appear to have no significant negative effect on labor supply; they may even encourage entrepreneurship."
Other policy tools and complementary measures
- Minimum wage laws:
- Generate more equality in earnings distribution.
- In developing economies, they "may actually increase labor productivity by improving the physical condition of workers" (efficiency wage theory).
- Empirical note: part of the drop in inequality in Brazil at the turn of the century has been "partly attributed to the significant increase in the minimum wage."
- Anti-discrimination laws:
- Can promote equality and foster growth by improving work and training incentives for minority groups.
- Anti-corruption strategies:
- By reducing rent seeking, they are strong candidates for simultaneously enhancing growth and income equality, though inequality arising from corruption can be difficult to observe.
Strategy choice, trade-offs, and policy guidance
- Trade-off framed by time horizon:
- Pure income redistribution: reduces poverty immediately but "generates less future growth" than opportunity-expanding policies.
- Opportunity-expanding policies: do less to reduce inequality today but yield "faster growth, less poverty, and greater equality tomorrow."
- Policy recommendation:
- Governments should choose a policy combination based on the relative importance of immediate poverty reduction versus longer-term growth and equality.
- Emphasis on raising resources in a progressive way and spending them on programs that benefit the poorest in the current or next generation.
- Enhancing the pro-poor nature or inclusiveness of growth strategies—especially fostering employment for unskilled workers—should be considered before or alongside redistribution.
- Political and administrative constraints:
- Political opposition and administrative capacity are obstacles to expanding redistribution, but modern information technology is likely to improve administrative capacity.
- Some parties will lose in the short run; instruments exist that "would benefit all in the long run, through faster growth, more rapid poverty reduction, and less inequality."
François Bourguignon, F&D Magazine, March 2018
Content in this bundle
- توزيع الثروة
- Redistribution of Income and Reducing Economic Inequality - IMF F&D Magazine
- Difundiendo la riqueza ● Ejercicio de equilibrio ● Finanzas y Desarrollo ● Marzo de 2018
- Partager les richesses
- Распределение богатства – Финансы и развитие – март 2018 года
- 让财富共享 - <金融与发展>, 2018年3月号·第55卷·第1期, 国际货币基金组织季刊