IMF AR 2018 IMF Annual Report 2018 Building a Shared Future

Making Growth Inclusive

Reducing inequality can open doors to growth and stability

Global inequality—income differences among countries—has been declining, but the picture within countries is less clear and varies depending on income group and country-specific factors. IMF research has shown that persistently high inequality is associated with lower, less durable economic growth and greater financial instability—which makes reducing inequality directly relevant to the IMF’s work.

What is the impact of income distribution on growth and stability?

Behind the scenes

Fostering inclusive growth

There is growing evidence that economic growth does not always benefit citizens equally and that a lack of inclusion can be macroeconomically harmful. An IMF paper shows that domestic policies are key for translating strong growth into prosperity for all. Countries should adopt policy frameworks that maintain sustainable growth with macroeconomic stability. Fostering inclusive growth requires measures to boost productivity and at the same time make sure that higher growth doesn’t come at the expense of equality. The IMF’s “Inclusive Growth” course, which was launched in 2013, discusses analytical and operational tools to promote inclusive growth and has become one of the most highly demanded IMF course offerings around the world.

Policies to address inequality and help enhance growth and economic inclusion at the same time include expanding access to quality education and healthcare for the poor, investing in infrastructure, deepening financial inclusion to reach the most vulnerable, and incentivizing increased female labor force participation.

Revenue collection and targeted spending are especially important in this context—the October 2017 Fiscal Monitor: Tackling Inequality discusses some options for addressing inequality while striking the right balance between efficiency and equity. Well-designed progressive income taxes, as well as certain wealth taxes, can contribute to reducing inequality without sacrificing growth. Ongoing empirical work shows that a “universal basic income” has the potential to reduce poverty and inequality but is contingent on a country’s administrative capacity and ability to enhance targeting of social spending.

Figure 1.3: Global inequality has been decreasing, but remains high within countries.

A chart showing that inequality between countries has been trending downward since 1988, but inequality within countries has been rising.

Note: Bar height indicates level of global inequality as measured by the mean log deviation (left hand scale). Orange bars show within-country inequality, weighted by population; yellow bars show level of between-country inequality, which captures differences in average income across countries.

Sources: Lakner and Milanović 2016; Milanović 2016; and World Bank 2016.

Inequality within countries has increased

Although income gaps between countries have narrowed, inequality within countries rose from the mid-1980s to the mid-2000s, especially in advanced economies. Numerous factors explain these trends:

  • Technological advances have mainly benefited owners of capital and highly skilled workers.
  • International trade, while remaining a vital engine of growth and poverty reduction, has—in tandem with labor-saving technologies and outsourcing—led to some job losses and displacement in the advanced economies.
  • Financial integration, without adequate regulation, can increase vulnerability to financial crises and boost the bargaining power of capital.
  • Domestic policies, in some countries, have reduced the bargaining power of labor, increased corporate concentration, made taxes less progressive, and weakened social protection.