Typical street scene in Santa Ana, El Salvador. (Photo: iStock)
IMF Survey : Regional Conference: Redistribution Has More Upsides than Downsides
March 23, 2015
- Redistribution is on average conducive to growth
- Asia’s recent growth accompanied by increased inequality
- Redistributive fiscal policy should be consistent with macroeconomic objectives, tax, and expenditure
Redistribution may have downsides, but they are probably offset by the positive benefits of greater equality on growth, an audience of policymakers from Asia has heard.
Woman walks past homeless man in Japan. High growth in Asia has reduced poverty, but has also been accompanied by rising inequality (photo: Corbis/Haruyoshi Yamaguchi)
INEQUALITY
The finding was highlighted at a high-level seminar, which took place in Tokyo on 12-13th March, of government officials, academics, and representatives of international organizations from all over Asia who met to discuss the issue of inequality, its implications for growth, and possible policy responses.
The seminar—the newest in a series on macroeconomic and financial policies—was jointly organized by Hitotsubashi University and the IMF’s Regional Office for Asia and the Pacific (OAP), and funded by the government of Japan.
The gathering was opened by the Director General of the International Bureau of the Japanese Ministry of Finance, Masatsugu Asakawa, and Hitotsubashi University Professor, Akira Ariyoshi, who highlighted the meeting’s aim of strengthening policy making capacity and fostering economic cooperation in Asia.
Negative relationship between inequality and growth
Jonathan Ostry, Deputy Director of the IMF’s Research Department, presented the conclusions of his recent research into inequality, which suggests that the pro-equality effect of redistribution more than offsets any direct adverse effect from redistribution, unless the latter is extreme.
“Inaction about inequality is unlikely to be appropriate in many cases, and we should not jump to the conclusion that the treatment for inequality—redistribution—may be worse for growth than the disease itself,” said Ostry.
Ostry’s findings on the links between inequality, growth, and redistribution build on his earlier work which documented a robust negative relationship between inequality and the sustainability of growth: more unequal societies have more fragile growth.
But that left unanswered whether the cure of redistribution, which may itself undermine growth, is worse than the disease of inequality itself. The main findings of Ostry’s most recent work are that higher inequality tends to be associated with lower growth, more unequal countries tend to redistribute more, and redistribution is, on average, pro-growth.
Recent trends and thinking on inequality
Deputy Chief Economist of the Asian Development Bank, Juzhong Zhuang, reviewed the trends and drivers of inequality in Asia, stressing that while the region’s high growth has led to large reductions in poverty, this has been accompanied by rising inequality in many countries.
“Reducing or eliminating inequality in opportunity is at the heart of an inclusive growth strategy,” said Zhuang.
The presentation by Deputy Director of the IMF Fiscal Affairs Department, Sanjeev Gupta, which drew on a recent IMF Board Paper, focused on the redistributive role of fiscal policy. Gupta stressed redistributive fiscal policy reduces inequality by a third in advanced economies, mostly through spending.
But fiscal redistribution is low in emerging market countries, especially in Asia, reflecting low revenues and social spending, low coverage of social insurance, gaps in health and education coverage, and poorly targeted subsidies which mostly accrue to upper-income households.
While this obviously calls for action on the redistribution front, policies need to be carefully thought through, suggested Gupta.
“Redistributive fiscal policy should be consistent with macroeconomic objectives, tax, and expenditure measures need to balance distributional and efficiency objectives, and design should take into account administrative capacity,” he said.
Country experiences
Seminar participants also discussed how some Asian countries dealt with inequality, including through the use of conditional cash transfer programs and financial inclusion initiatives in the Philippines, and policies to facilitate upward mobility and build customized social safety nets in Korea.
OAP Senior Economist, Giovanni Ganelli, presented the results of a recent research paper which evaluates the impact in terms of inclusiveness of the “Abenomics” policies currently undertaken by the Japanese government.
“The main policy implication is that fully launching the “Third Arrow” of Abenomics, which should include labor market reforms to increase female labor participation and reduce duality, is necessary to both foster growth and increase equality” said Ganelli.
Reducing inequality for macroeconomic stability
In his concluding remarks, OAP Director, Odd Per Brekk, stressed takeaways from the seminar. One is that recent research has made it clear that reducing inequality, which has traditionally been seen as a social or political objective, is also important for growth and macroeconomic stability. This is due to both direct channels, such as the effect on health and human capital accumulation, and indirect ones, such as the fostering of social consensus in favor of structural reforms.
The discussion also highlighted that while tax and spending measures often take center stage in reducing inequality, other economic policies also matter.
“While the details of the policies should obviously be country specific, not only fiscal policies, but also financial, labor market, and structural policies should be part of the toolkit” said Brekk.
He stressed that OAP would continue its broad-based range of initiatives to support capacity building, and the mutual exchange of ideas in Asia.